01 ITJ Online Reference File Sarswatji

(2021) ABC 1
Sir Ratan Tata

Reference Judgments
(2018) 5 ITJ Online 686 (SC)
In the Supreme Court of India
Arcelormittal India Private Limited
v.
Satish Kumar Gupta & Ors.
Shri R.F. Nariman, J.
Civil Appeal Nos. 9402-9405, 9582 of 2018
with Diary No.35253, 33971 of 2018
4th October, 2018
Ineligibility Person to submit Resolution-S.29A of IBC Code,2016- the
resolution plan presented byNumetal. Numetal was incorporated in Mauritius
on 13.10.2017, expressly for the purpose Regulation 32 of the Insolvency and
Bankruptcy Board of India (Liquidation Process) Regulations, 2016, states
that the liquidator may also sell the corporate debtor as a going concern. of
submission of a resolution plan qua the corporate debtor, i.e., ESIL. Two
other companies, viz., AHL and AEL, were also incorporated on the same day
in Mauritius. Shri Rewant Ruia, son of Shri Ravi Ruia (who was the promoter
of ESIL) held the entire share capital of AHL, which in turn held the entire
shareholding of AEL, which in turn held the entire share capital of Numetal.
At this stage there can be no doubt whatsoever that Shri Rewant Ruia, being
the son of Shri Ravi Ruia, would be deemed to be a person acting in concert
with the corporate debtor, being covered by Regulation 2(1)(q)(v) of the 2011
Takeover Regulations.
-On 18.10.2017, AEL transferred its shareholding of 26.1% in Numetal to a
group company, viz., ECL. This group company is ultimately owned by Virgo
Trust and Triton Trust, the beneficiaries of which are companies owned by
Shri Ravi Ruia, his brother Shri Shashikant Ruia and their immediate family
members. The object of including ECL, as stated in the relevant extract from
Numetals expression of interest is as follows:
The Company satisfies the minimum tangible net worth requirement of
INR 30 Billion considering ECL, as a group company that holds 26.1%
(Twenty Six point one Percent) shares in the Company, has net worth of
USD 2,974 million (US Dollars Two Thousand Nine Hundred Seventy
Four million) or INR 192.8 Billion (Rupees One Hundred Ninety Two
Point Eight Billion) as on 31st March 201 (immediately preceding
completed financial year). Please refer Annexure I for the certificate of
2 Income Tax Judgments – Reports (Vol. 40)
Chartered Accountant of the Company certifying satisfaction of the

minimum tangible net worth requirement in terms of the Eligibility
Criteria which includes A, a certificate of Chartered Accountant
certifying ECLs tangible net worth. It is pertinent to note that in case the
company is considered as a consortium potential resolution applicant, it
continues to satisfy the minimum tangible net worth requirement since
the total tangible net worth of the Company, computed on the basis of the
weighted average of AEIs and ECLs net worth proportionate to their
respective shareholding inthe Company, is INR 50.33 Billion, which is in
excess of INR 30 Billion.
-The very next day, Shri Rewant Ruia settled an irrevocable and discretionary
trust, viz., the Crescent Trust, and settled the entire share capital of AHL into
the Trust, at a par value of USD 10,000. The beneficiaries of this Trust were
general charities, as well as entitles owned by Shri Shashikant Ruia (brother
of Shri Ravi Ruia, promoter of the corporate debtor), and entities owned by
Shri Rewant Ruia himself.
-On 20.11.2017, Shri Rewant Ruia settled Prisma Trust, another irrevocable
and discretionary trust, whose beneficiaries are general charities and one Solis
Enterprises Limited, a company incorporated in Bermuda, whose share capital
is held by Shri Rewant Ruia. Numetal, vide a response dated 30.3.2018,
admitted that while the trust deed relating to Prisma Trust allowed the trustee
to benefit any English or Bermuda charity, no particular charity is named at
this stage. The Trustee of AEL is one Rhone Trustee, Singapore. What is
important to note is that Shri Rewant Ruia was the ultimate natural person
who held the beneficial interest in AEL through Prisma Trust, through Solis
Enterprises Limited. This emerges from Section 6.7 of the resolution plan
submitted by Numetal to the Resolution Professional. Interestingly enough, in
an affidavit dated 05.03.2018, the Trustee of Prisma Trust submitted:
that the Trustee (for itself and each person controlled by it), hereby confirm
that AEL or Rewant Ruia neither are nor will, following the implementation
of the Resolution Plan, be a promoter of or have control over or have any
management rights in the RA or ESIL (or the resultant company upon
completion of the Merger) (including without limitation, the rights to appoint
directors on the board of the RA or ESIL, or any specific veto rights or the
right to direct the policy or management of the RA or ESIL in any manner).
-The Resolution Professional, after looking at this affidavit, correctly noted
that statements of such a nature would not have been made by a truly
independent trustee of a discretionary trust, which demonstrates that the
trustee was under the complete control of Shri Rewant Ruia. This in turn
indicates that Prisma Trust is one more smokescreen in the chain of control,
which would conceal the fact that the actual control over AEL is by none
other than Shri Rewant Ruia himself.
-Curiouser and Curiouser was the expression of Alice, in Lewis Carrolls Alice
in Wonderland. In this wonderland of Shri Rewant Ruia, one day later on
(2021) ABC 3
22.11.2017, the trustees of the Prisma Trust now acquired 100% of the
shareholding of AHL for a par value of approximately USD 10,000 from the
trustees of the Crescent Trust. On this very date, merely one day before the
Ordinance bringing into force Section 29A was promulgated, ECL transferred
its shareholding of 26.1% of the share capital of Numetal to Crinium Bay, an
indirect wholly owned subsidiary of VTB Bank, whose shares in turn are held
by the Russian Government. AEL also transferred shares representing 13.9%
of the share capital of Numetal to Crinium Bay, thus making Crinium Bays
total holding in Numetal 40%. On the same date, AEL also transferred shares
representing 25.1% of the share capital of Numetal to Indo, and also
transferred shares representing 9.9% of the share capital of Numetal to TPE.
These transfers are likely to have taken place between 10.2.2018 and
12.2.2018. At the time of submission of its first Resolution Plan dated
12.2.2018, the shareholding of Numetal was as follows:
Crinium Bay : 40%
Indo : 25.1%
TPE : 9.9%
AEL : 25%
-That, as of this date, Shri Rewant Ruia, who is the ultimate beneficiary in the
chain of control of the trusts which in turn controlled AEL, was very much on
the scene, holding through AEL 25% of the shareholding of Numetal.
-One other extremely important fact needs to be noticed at this stage. The
earnest money in the form of Rs. 500 crores, credited to the account of the
corporate debtor, has been provided to Numetal by AEL as a shareholder of
the resolution applicant, viz. Numetal. It is important to note that this earnest
money deposit of Rs.500 crores made by AEL continues to remain with the
Resolution Professional till date, despite the fact that, by the time the second
resolution plan was submitted by Numetal on 02.04.2018, AEL had exited as
a shareholder of Numetal. It is also important to note that under clause 4.4.4
of the request for proposal for submission of resolution plans for ESIL, the
earnest money deposit stands to be forfeited if any condition thereof is
breached or the qualifications of the potential resolution applicant are found to
be untrue. At this stage, it is important to reproduce relevant extracts of the
resolution plan first submitted by Numetal in response to the request for
proposal. The same are as under:
4. the Resolution Applicant is a newly established company that has been
incorporated to provide a platform to create and sustain a leading Indian
steel business and is focused on the acquisition and turnaround of the
Corporate Debtor.
Accordingly, to implement the Plan, Numetal believes that it has access
to the right mix and balance of the financial and technical market
experience which can be provided to the Corporate Debtor.
Numetal is held by four independent shareholders, who possess
complementary skill-sets in financial, operational, trading and industrial

sectors together with regional expertise that will support the business in
the medium and longer term.
xxx xxx xxx 5.2. (i) Numetal is backed by seasoned and experienced
shareholders who bring deep expertise from different industries covering
Finance, Steel, Oil and Gas, Metal Mining, Trading expertise across
geographies. Crinium Bay Holdings Limited (Crinium Bay) an indirect
wholly owned subsidiary of VTB Bank PJSC (VTB Bank). VTB Bank is
one of the largest emerging market groups listed on Moscow Exchange
(MOEX) and London Stock Exchange (LSE) with current market
capitalization of approximately US$ 12.3bn (approximately INR 79,000
Crores) and total assets in excess of approximately US$ 220bn
(approximately INR 14,08,000).
xxx xxx xxx VTB Banks support to provide financing, credit assistance
to the Resolution Applicant is set out in Annexure 2 and is subject to the
terms of the letter provided therein.
The other shareholders in Numetal also have material businesses with
international operations focused on the steel, materials and resources
sector-
(a) Tyazhpromexport JSC (TPE) a leading engineering agency in Russia
in ferrous and non ferrous metallurgy project operations and construction
with experience with over 60 years and wholly owned by Russian State
corporation, Rostec;
(b) Indo International Trading FZCO (Indo or IITF), a leading
commodity trading company; and
(c) Aurora Enterprise Trading (sic) Limited (AEL or Aurora) a financial
investor with regional expertise. Numetals (sic) shareholders bring
together a wealth of experience in technical and operational capabilities,
banking and finance, commodity trading and regional expertise for the
benefit of creating long term steel business.
xxx xxx xxx 6.3. The shareholders of Numetal bring to the table,
considerable experience from difference industries covering finance,
steel, oil and gas, metals and mining chemicals and other sectors across
geographies. They have extensive experience in the field of management
of distressed assets/situations, restructuring of debt, turnaround of
corporates and improvement of strategies for cash flows. In addition
these shareholders have a good understanding of Asian markets having
dealt with large corporates in these markets. The above factors coupled
with the financial strength of its shareholders, put Numetal in a strong
position to implement the turnaround successfully. xxx xxx xxx
(c) Aurora Enterprises Limited (AEL) brings a careful focus on financial
returns and expertise of the Indian business and commercial sector to
Numetal. AEL is a pure financial investor.
(2021) ABC 5
The beneficiaries of such discretionary trust are general charities and

Solis Enterprise Limited, a company incorporated in Bermuda, the share
capital of which is held by Mr. Rewant Ruia.
Mr. Rewant Ruia is the son of Ravi Ruia, who is one of the existing
promoters of the Corporate Debtor.
-Clause 6.7 of Numetals resolution plan stipulated that it satisfied the
minimum tangible net worth requirement, as set out under the request for
proposal, because Crinium Bay held 40% of the shareholding of Numetal, and
that VTB Bank, Crinium Bays holding company had sufficient net worth, as
on 31.12.2016, to comply with the requirement under the request for proposal.
The Resolution Professional, in its affidavit before the Adjudicating
Authority, took note of this plan and, therefore, stated:
Under Para 1 of the Eligibility Criteria for Potential Resolution
Applicants published by this Respondent on the website of the Corporate
Debtor, potential resolution applicants were given the option of
satisfying the minimum tangible net worth net owned funds requirement
at a Group Level by taking into consideration the financial of entities
controlling or controlled by or under common control with the potential
resolution applicant. It is evident from the foregoing that Numetal took
advantage of this provision and relied upon the financial wherewithal of
its constituents/shareholders. Numetal has not submitted or relied upon
its stand-alone financials to satisfy the eligibility criteria. It is submitted
that having taken advantage of this provision it is not open to Numetal to
contend that this Respondent cannot look at its constituents/ shareholders
when determining the issue of eligibility under Section 29A of the Code.
Further, it is submitted that even though the RFP document does not
allow a resolution applicant to look at its constituents/ shareholders for
the purposes of demonstrating its experience, it is clear from the
foregoing that Numetal has extensively relied on the experience of its
constituents/shareholders to demonstrate its experience. It is submitted
that having relied on the experience of its constituents/shareholders it is
not open to Numetal to contend that this Respondent cannot look at its
constituents/shareholders when determining the issue of eligibility under
Section 29A of the Code.
-The excerpted portions of Numetals resolution plan make it clear that, since
Numetal itself was a newly incorporated entity, with no financial or
experience credentials of its own, it therefore relied entirely on the credentials
of each of its constituent shareholders. This shows that Numetal itself
revealed in its resolution plan that its corporate veil should be lifted, for
without lifting this veil, none of the parameters of the request for proposal
could have been met by Numetal itself. It is thus clear that the four
shareholders of Numetal were persons acting jointly within the meaning of
Section 29A. This being the case, it is clear that Shri Salves argument that
VTB Bank is a connected person, being ineligible under sub-clause (j), would
have to be rejected, as VTB Bank is itself, through its wholly owned

subsidiary of Crinium Bay, a person acting jointly with the three other
shareholders of Numetal, and would, therefore, fall within the first part of
Section 29A itself. This being so, it cannot be said that VTB Bank is a person
connected to any one of the persons acting jointly, as it is itself a person
acting jointly, and therefore covered by the first part of Section 29A.
-It is important to note that on 29.03.2018, AEL transferred its 25%
shareholding in Numetal to the other three constituent shareholders, thereby
leaving its shareholding in Numetal as Nil. In response to the Resolution
Professionals invitation, the second Resolution Plan, therefore, submitted by
Numetal on 02.04.2018, did not have AEL as a constituent of Numetal;
instead, Crinium Bay continued with 40% of the shareholding of Numetal,
with TPEs holding now augmented to 29.5% and Indos to 34.1%.
-Given the fact that Shri Rewant Ruia is a person deemed to be acting in
concert with his father Shri Ravi Ruia (who was a promoter of the corporate
debtor ESIL), there is no doubt whatsoever that Section 29A(c) would be
attracted as on the date of submission of the first resolution plan, viz.
12.02.2018, as AEL was held by Prisma Trust, whose ultimate beneficiary is
Shri Rewant Ruia himself. This would show that the NPA declared over a
year before the date of commencement of the corporate resolution process of
ESIL (i.e. in 2015) would render Numetal ineligible to submit a resolution
plan. The only manner in which Numetal could successfully present a
resolution plan would be to first pay off the debts of ESIL, as well as those of
such other corporate debtors of the Ruia group of companies, which were
declared as NPAs prior to the aforesaid period of one year, before submitting
its resolution plan. However, if the date of the second resolution plan is to be
seen, Shri Rewant Ruia appears to have disappeared from the scene
altogether, as the three entities left are stated to be independent entities in the
form of two Russian entities and one UAE entity. Viewed on 02.04.2018,
therefore, could it be said that Shri Rewant Ruia had disappeared from the
scene altogether, so as to obviate the application of Section 29A(c)? The
obvious answer is no. This is for two reasons. First, as has been stated earlier,
the Rs.500 crores that has been deposited towards submission of earnest
money continues to remain deposited by AEL even post 02.04.2018, showing
thereby that Shri Rewant Ruia continues to be present, insofar as Numetals
second resolution plan is concerned. Further, having regard to the reasonably
proximate state of affairs before submission of the resolution plan on
02.04.2018, beginning with Numetals initial corporate structure, and
continuing with the changes made till date, it is evident that, the object of all
the transactions that have taken place after Section 29A came into force on
23.11.2017 is undoubtedly to avoid the application of Section 29A(c),
including its proviso. We therefore hold that, whether the first or second
resolution plan is taken into account, both would clearly be hit by Section
29A(c), as the looming presence of Shri Rewant Ruia has been found all
(2021) ABC 7
along, from the date of incorporation of Numetal, till the date of submission
of the second resolution plan.
-In February/March 2014, the Russian Federation annexed the Ukrainian
region of Crimea. Consequently, on 6.3.2014, the President of the United
States issued Executive Order 13660, pursuant to the International Emergency
Economic Powers Act and the National Emergencies Act. The said order
sought to block the property of Russian entities contributing to the situation in
Ukraine. Summarizing the executive order issued by the President, the
Department of Treasurys Office of Foreign Assets Control commented:-
The Ukraine/Russia-related sanctions program implemented by the Office of
Foreign Assets Control (OFAC) began on March 6, 2014, when the President,
in Executive Order (E.O.) 13660, declared a national emergency to deal with
the threat posed by the actions and policies of certain persons who had
undermined democratic processes and institutions in Ukraine; threatened the
peace, security, stability, sovereignty, and territorial integrity of Ukraine; and
contributed to the misappropriation of Ukraines assets. In further response to
the actions and polices of the Government of the Russian Federation,
including the purported annexation of the Crimea region of Ukraine, the
President issued three subsequent Executive orders that expanded the scope of
the national emergency declared in E.O. 13660. Together, these orders
authorize, among other things, the imposition of sanctions against persons
responsible for or complicit in certain activities with respect to Ukraine;
against officials of the Government of the Russian Federation; against persons
operating in the arms or related materiel sector of the Russian Federation; and
against individuals and entities operating in the Crimea region of Ukraine.
E.O. 13662 also authorizes the imposition of sanctions on certain entities
operating in specified sectors of the Russian Federation economy. Finally,
E.O. 13685 also prohibits the importation or exportation of goods, services, or
technology to or from the Crimea region of Ukraine, as well as new
investment in the Crimea region of Ukraine by a United States person,
wherever located.
-The Office of Foreign Assets Control thereafter issued Directive Number 1
under Executive Order 13662, stating:-
DIRECTIVE 1 (AS AMENDED ON SEPTEMBER 29, 2017) UNDER
EXECUTIVE ORDER 13662 Pursuant to Sections 1(a)(i), 1(b), and 8 of
Executive Order 13662 of March 20, 2014, Blocking Property of
Additional Persons Contributing to the Situation in Ukraine (the Order)
and 31 C.F.R. § 589.802, taking appropriate account of the Countering
Russian Influence in Europe and Eurasia Act of 2017, and following the
Secretary of the Treasurys determination under Section 1(a)(i) of the
Order with respect to the financial services sector of the Russian
Federation economy, the Director of the Office of Foreign Assets
Control has determined, in consultation with the Department of State,
that the following activities by a U.S. person or within the United States
are prohibited After this, the Office of Foreign Assets Control issued
Directive Number 2, under Executive Order 13662, stating:-
EXECUTIVE ORDER 13662 Pursuant to sections 1(a)(i), 1(b), and 8 of
Order with respect to the energy sector of the Russian Federation
economy, the Director of the Office of Foreign Assets Control has
determined, in consultation with the Department of State, that the
following activities by a U.S. person or within the United States are
prohibited, except to the extent provided by law or unless licensed or
otherwise authorized by the Office of Foreign Assets Control: (1) For
new debt issued on or after July 16, 2014 and before November 28, 2017,
all transactions in, provision of financing for, and other dealings in new
debt of longer than 90 days maturity of persons determined to be subject
to this Directive or any earlier version thereof, their property, or their
interests in property.
(2) For new debt issued on or after November 28, 2017, all transactions
in, provision of financing for, and other dealings in new debt of longer
than 60 days maturity of persons determined to be subject to this
Directive or any earlier version thereof, their property, or their interests
in property.
All other activities with these persons or involving their property or
interests in property are permitted, provided such activities are not
otherwise prohibited pursuant to Executive Orders 13660, 13661, 13662,
or 13685 or any other sanctions program implemented by the Office of
Foreign Assets Control.
-The names of persons determined to be subject to the directives issued under
Executive Order 13662 are published in the Sectoral Sanctions Identification
List, published by the Office of Foreign Assets Control. A perusal of this list
shows that VTB Bank is listed therein, along with various entities affiliated to
it.
-Similarly, under EU Council Regulation 833 of 2014 dated 31.07.2014,
certain restrictive measures in view of Russian actions destabilizing the
situation in Ukraine were taken against certain Russian entities, of which
VTB Bank was one. These measures included:
(5) It is also appropriate to apply restrictions on access to the capital
market for certain financial institutions, excluding Russia-based
institutions with international status established by intergovernmental
agreements with Russia as one of the shareholders.
(2021) ABC 9
Other financial services such as deposit business, payment services and

loans to or from the institutions covered by this Regulation, other than
those referred to in Article 5, are not covered by this Regulation. Under
Article I of this regulation, a transferable security was defined as:
(f) transferable securities means those classes of securities which are
negotiable on the capital market, with the exception of instruments of
payment, such as:
(i) shares in companies and other securities equivalent to shares in
companies, partnerships or other entities, and depositary receipts in
respect of shares,
(ii) bonds or other forms of securitised debt, including depositary
receipts in respect of such securities,
(iii) any other securities giving the right to acquire or sell any such
transferable securities or giving rise to a cash settlement; Article V
thereto provided:-
It shall be prohibited to directly or indirectly purchase, sell, provide brokering
or assistance in the issuance of, or otherwise deal with transferable securities
and money-market instruments with a maturity exceeding 90 days, issued
after 1 August 2014 by Further, Annexure III thereto listed VTB Bank as one
of the institutions subject to the restrictive measures.
-Held-
-It is clear that both sets of resolution plans that were submitted to the
Resolution Professional, even on 2.4.2018, are hit by Section 29A(c), and
since the proviso to Section 29A(c) will not apply as the corporate debtors
related to AMIPL and Numetal have not paid off their respective NPAs,
ordinarily, these appeals would have been disposed of by merely declaring
both resolution applicants to be ineligible under Section 29A(c). Shri
Subramanium, on behalf of the Committee of Creditors, requested us to give
one more opportunity to the parties before us to pay off their corporate
debtors respective debts in accordance with Section 29A, as the best
resolution plan can then be selected by the requisite majority of the
Committee of Creditors, so that all dues could be cleared as soon as possible.
Acceding to this request, in order to do complete justice under Article 142 of
the Constitution of India, and also for the reason that the law on Section 29A
has been laid down for the first time by this judgment, we give one more
opportunity to both resolution applicants to pay off the NPAs of their related
corporate debtors within a period of two weeks from the date of receipt of this
judgment, in accordance with the proviso to Section 29A(c). If such payments
aremade within the aforesaid period, both resolution applicants can resubmit
their resolution plans dated 02.04.2018 to the Committee of Creditors, who
are then given a period of 8 weeks from this date, to accept, by the requisite
majority, the best amongst the plans submitted, including the resolution plan
submitted by Vedanta. We make it clear that in the event that no plan is found
worthy of acceptance by the requisite majority of the Committee of Creditors,
the corporate debtor, i.e. ESIL, shall go into liquidation.
-From the aforementioned facts, there can be no doubt whatsoever that
Fraseli, being a company managed and controlled by Shri L.N. Mittal, holding
one third of the shares in KSS Global, which in turn held 100% of the share
capital in KSS Petron, was in joint control of KSS Petron, if the corporate veil
of all these companies is disregarded. Further, the Shareholders Agreement of
19.5.2011 makes it clear that the joint control of KSS Global would be
between three entities, viz., KSS Holding, KSS Infra EALQ and Fraseli, each
of whom had the right to appoint an equal number of directors on the board of
directors of KSS Global. Not only this, but Fraseli was also granted
affirmative voting rights as aforementioned, on certain important specified
matters. There would be no doubt whatsoever that, just before presentation of
the resolution plan of 12.02.2018, AMIPL wouldbe hit by Section 29A(c), as
a group company of Shri L.N. Mittal exercised positive control, by its
shareholding, right to appoint directors and affirmative voting rights, over
KSS Global, which in turn held 100% shareholding in KSS Petron. Again, as
in the case of Uttam Galva, there can be no doubt whatsoever that the sale of
Fraselis shareholding in KSS Global, together with the resignation of the
Mittal directors from the board of directors of KSS Global, is a transaction
reasonably proximate to the date of submission of the resolution plan by
AMIPL, undertaken with the sole object of avoiding the consequence
mentioned in the proviso to Section 29A(c). Having regard to the law laid
down by us in this judgment, it is, therefore, clear that AMIPL is ineligible
under Section 29A(c) of the Code, on this account as well
Final outcome – Disposed Off

Relevant Provisions : S.29A of IBC Code,2016
Relevant Period: A.Y..N/a.
Decision Referred/Discussed :
A.S. Antulay v. R.S. Nayak & Ors. (1988) Supp. 1 S.C.R. 1 at page 71 [Refer
Para 83]
Balwant Rai Saluja & Anr. etc. etc. v. Air India Ltd. & Ors., (2014) 9 SCC
407 [Refer Para 32]
Ben Hashem v. Ali Shayif, 2008 EWHC 2380 (Fam) [Refer Para 32]
Chintalapati Srinivasa Raju v. Securities and Exchange Board of India, (2018)
7 SCC 443 [Refer Para 51]
CIT v. East Coast Commercial Co. Ltd., (1967) 1 SCR 821 [Refer Para 40]
CIT v. Sri Meenakshi Mills Ltd.,(1967) 1 SCR 934 [Refer Para 30]
Commissioner of Income Tax, Delhi v. S. Teja Singh, (1959) Supp. 1 S.C.R.
394 [Refer Para 75]
(2021) ABC 11
Delhi Development Authority v. Skipper Construction Company (P) Ltd. &
Another, (1996) 4 SCC 622 [Refer Para 33]
DHN Food Distributors Ltd. v. London Borough of Tower Hamlets, (1976) 3
All ER 462 [Refer Para 33]
DR Venkatachalam v. Transport Commr., (1977) 2 SCC 273 [Refer Para 26]
Dr. Manjula Krippendorf v. State (Govt. of NCT of Delhi) & Anr., (2017) 15
SCC 133 [Refer Para 26]
E.V. Mathai v. Subordinate Judge, Kottayam & Ors., (1969) 2 SCC 194
[Refer Para 57]
Escorts case, (1986) 1 SCC 264 [Refer Para 31,32]
European jurisdictions.,(1990) 53 Modern Law Review 338 [Refer Para 33]
Exchange Board of India v. Kishore R. Ajmera, (2016) 6 SCC 368 [Refer
Para 51]
Faqir Chand Gulati v. Uppal Agencies Pvt. Ltd. & Anr., (2016) 1 ITJ Online
732 (SC) : (2013) 8 STD 693 : (2008) 10 SCC 345 [Refer Para 35]
Heydon case, (1584) 3 Co Rep 7a : 76 ER 637 [Refer Para 26]
Innoventive Industries Ltd. v. ICICI Bank & Anr. (2018) 1 SCC 407 at
paragraph 12 [Refer Para 64,66]
Jang Singh v. Brijlal & Ors. (1964) 2 S.C.R. 146 at page 149 [Refer Para 83]
Jubilee Mills Ltd., (1963) 48 ITR 9 (SC), [Refer Para 40]
Lachmeshwar Prasad Shukul & Ors. v. Keshwar Lal Chaudhuri & Ors. AIR
1941 FC 5 [Refer Para 82]
Laurel Energetics Private Limited v. Securities and Exchange Board of India,
(2017) 8 SCC 541 [Refer Para 35]
LIC v. Escorts Ltd.,(1986) 1 SCC 264 [Refer Para 32]
Life Insurance Corporation of India v. Escorts Ltd. & Ors., (1986) 1 SCC 264
[Refer Para 30]
M/s. Daiichi Sankyo Company Ltd. v. Jayaram Chigurupati & Ors., (2010) 7
Madras Petrochem Ltd. and Anr. v. Board for Industrial and Financial
Reconstruction and Ors., (2016) 4 SCC 1 [Refer Para 62]
Prest v. Petrodel Resources Ltd. ,(2013) 2 AC 415 [Refer Para 32]
Salomon v. A Salomon and Co. Ltd. (1897) AC 22 [Refer Para 29,30]
Salomon v. Salomon & Co. Ltd., (1897) AC 22 [Refer Para 32,33]
Surendra Trading Co. v. Juggilal Kamlapat Jute Mills Company Ltd. & Ors.
(2017) 16 SCC 143 [Refer Para 69]
Tata Engineering and Locomotive Co. Ltd. v. State of Bihar, (1964) 6 SCR
885 [Refer Para 30]
Tata Engineering and Locomotive Co. Ltd., (1964) 6 SCR 885 [Refer Para
30]
Technip SA v. SMS Holding (Pvt.) Ltd. & Ors., (2005) 5 SCC 465 [Refer
Para 40]
TELCO v. State of Bihar,(1964) 6 SCR 885 [Refer Para 33]
Union of India v. ABN Amro Bank and others, (2013) 16 SCC 490 [Refer
Para 31]
Union of India v. R, Gandhi, President, Madras Bar Association, (2010) 11
Union of India v. Ramesh Gandhi, (2012) 1 SCC 476 [Refer Para 31]
Vide Curtis v. Stovin, (1889) 22 Q.B.D.513 [Refer Para 75]
Wallersteiner v. Moir, (1974) 3 All ER 217 [Refer Para 30]
Whitney v. Commissioners of Inland Revenue, (1925) 10 Tax Cas.88, 110
[Refer Para 75]
Workmen v. Associated Rubber Industry Ltd., (1985) 4 SCC 114 [Refer Para
30]
Counsel :
– , for the Appellant;
– , for the Respondent.
JUDGMENT
Shri R.F. Nariman, J. :
1. The facts of the present case revolve around the ineligibility of resolution
applicants to submit resolution plans after the introduction of Section 29A
into the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the
Code), with effect from 23.11.2017. Signature Not Verified Digitally signed
by SHASHI SAREEN
2. On 2.8.2017, the Adjudicating Authority, being the NCLT, Date:
2018.10.04 14:34:29 IST Reason: Ahmedabad Bench, passed an order under
Section 7 of the Code at the behest of financial creditors, being the State Bank
of India and the Standard Chartered Bank, admitting a petition filed under the
Code for financial debts owed to them by the corporate debtor Essar Steel
India Limited (hereinafter referred to as ESIL), in the sum of roughly
Rs.45,000,00,00,000/- (Rupees Forty Five Thousand Crores). Shri Satish
Kumar Gupta was appointed as the Interim Resolution Professional and
confirmed as such on 04.09.2017. Consequently, the Resolution Professional
published an advertisement dated 06.10.2017, seeking expression of interest
from potential resolution applicants who wished to submit resolution plans for
the revival of ESIL. In terms of the advertisement, the last date for submission
of an expression of interest was 23.10.2017. Pursuant to this advertisement,
one ArcelorMittal India Private Limited (hereinafter referred to as AMIPL)
submitted an expression of interest on 11.10.2017. An entity called Numetal
Limited (hereinafter referred to as Numetal), also submitted an expression of
(2021) ABC 13
interest on 20.10.2017. On 24.12.2017, the Resolution Professional published
a request for proposal, in which it was stated that the last date for submission
of resolution plans would be 29.1.2018. On a request made by the Committee
of Creditors, the NCLT extended the duration of the corporate insolvency
resolution process by 90 days beyond the initial period of 180 days, i.e., upto
29.04.2018. The Resolution Professional therefore issued the first addendum
to the request for proposal, extending the date for submission of resolution
plans to 12.02.2018. Given this, both AMIPL and Numetal submitted their
resolution plans on this date. On 20.03.2018, apprehending that the
Resolution Professional would recommend that it be declared ineligible,
Numetal filed I.A. No. 98 of 2018 before the NCLT inter alia seeking that it
be declared eligible as a resolution applicant. On 23.03.2018, however, the
Resolution Professional found both AMIPL and Numetal to be ineligible
under Section 29A. Insofar as AMIPL is concerned, the Resolution
Professional found thus:
2. Please note that during the course of the evaluation of the Resolution
Plan, I became aware of the fact that ArcelorMittal Netherlands B.V.
(AM Netherlands) (which is mentioned as a connected person of AM
India in the Resolution Plan) has been disclosed as the promoter of
Uttam Galva Steels Limited (Uttam Galva) pursuant to which my
Advisor had requested certain clarifications from AM India on 26
February 2018 (Request for Clarification 1) and on 14 March 2018
(Request for Clarification 2). Further to the responses received from AM
India on 28 February 2018 and 17 March 2018 (collectively the AM
India Responses) on the aforementioned requests for clarifications, I
understand that:
2.1. AM Netherlands had acquired 29.05% of the shareholding in Uttam
Galva in 2009 and has since been classified as a promoter of Uttam
Galva; 2.2. AM Netherlands had entered into a co-promoter agreement
dated 4 September 2009 with the other promoters of Uttam Galva (Co-
Promoter Agreement) under which AM Netherlands had various rights
(including certain rights which can be considered as participative in
nature and not merely protective); 2.3. Uttam Galvas account was
classified as a non- performing asset (NPA) on 31 March 2016 by Canara
Bank and Punjab National Bank (which classification has continued for
more 1 year till 02 August 2017); 2.4. AM Netherlands has sold its
shareholding in Uttam Galva to the other promoters of Uttam Galva on 7
February 2018; and 2.5. AM Netherlands has applied to the National
Stock Exchange Limited and the BSE Limited, each on 8 February 2018
for declassification as a promoter of Uttam Galva under Regulation
31A(2) of the Securities and Exchange Board of India
3. Further, as on the Plan Submission Date, AM Netherlands (had not
obtained the Stock Exchange Approvals relating to declassification as a
promoter of Uttam Galva and) continued to be classified as a promoter of
Uttam Galva.
4. In light of the above, AM India is ineligible under the provisions of
Section 29A(c) of the IBC and pursuant to paragraph 4.11.2(a) of the
RPP, the Resolution Plan is hereby rejected and will not be placed before
the Committee of Creditors.
3. Similarly, holding Numetal to be ineligible, the Resolution Professional,
on the same date, found:
2.1. as on the date of submission of its expression of interest (EOI) on 20
October 2017 by Numetal, it relied on Essar Communications Limited
(ECL), one of its shareholders to comply with the eligibility requirement
relating to its tangible net worth (TNW) (as stipulated in the Section
titled Eligibility Criteria in the EOI);
2.2. as on the Plan Submission Date, Numetal relied on Crinium Bay, its
shareholder to comply with the eligibility requirement relating to its
TNW (as stipulated in Section 6.7 of the Resolution Plan);
2.3. Numetal was incorporated 7 days before submission of the EOI; and
2.4. Numetal is a newly incorporated joint venture between Aurora
Enterprises Limited, Crinium Bay, Indo International Limited and
Tyazhpromexport.
3. Since Numetal has at all stages relied on its shareholders to comply
with the eligibility requirements relating to submission of a resolution
plan in respect of ESIL, for the purposes of ensuring compliance with
Section 29A of the Insolvency and Bankruptcy Code, 2016 (IBC), I have
considered each of the shareholders of Numetal as joint venture partners
to be acting jointly for the purposes of submission of the Resolution
Plan. Whilst considering the eligibility of the shareholders of Numetal,
since Aurora Enterprises Limited (AEL) is held completely by Rewant
Ruia (through various companies and a trust), I have considered Rewant
Ruia, Crinium Bay, Indo International Limited and Tyazhpromexport for
scrutiny under Section 29A of the IBC.
4. Further, pursuant to Regulation 2(q) of the Securities and Exchange
Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011 (SAST Regulations), a person is deemed to acting in
concert with amongst others, his (or her) immediate relatives, which term
(as defined under Regulation 2(1) of the SAST Regulations) includes the
father of such person. Therefore, in relation to the Resolution Plan in
respect of ESIL (which contemplates the acquisition of ESIL by Numetal
by way of a merger of ESIL with a wholly owned subsidiary of
Numetal), Rewant Ruia is deemed to be acting in concert with his father
Ravi Ruia.
5. Further, as on the Plan Submission Date:
(2021) ABC 15
(a) Ravi Ruia (who Rewant Ruia is deemed to be acting in concert
with) was the promoter of ESIL whose account was classified as an
NPA for more than 1 year, prior to the commencement of corporate-
insolvency resolution process (CIRP) of ESIL on 2 August 2017;
and
(b) Ravi Ruia (who Rewant Ruia is deemed to be acting in concert
with) has executed a guarantee in favour of SBI (for itself and a
consortium of lenders) and the CIRP application filed by SBI has
been admitted by the National Company Law Tribunal on 2 August
2017.
6. In light of the above, Rewant Ruia (who is acting jointly with the other
shareholders of Numetal for the purposes of submission of the
Resolution Plan) is ineligible under Section 29A of the IBC, specifically
paragraphs (c) and (h) and accordingly, as on the Plan Submission Date,
Numetal (which is nothing but an incorporated joint venture investment
vehicle through which its shareholders are submitting the Resolution
Plan) was not eligible under Section 29A of the IBC.
7. Accordingly and for the reasons set out in paragraphs 5 and 6 above,
please note that pursuant to paragraph 4.11.2(a) of the RFP, the
Resolution Plan is hereby rejected and will not be placed before the
Committee of Creditors.
4. On 26.3.2018, AMIPL filed I.A. No. 110 of 2018 before the
Adjudicating Authority, challenging the order of the Resolution Professional
dated 23.03.2018. Numetal did likewise vide I.A. No. 111 of 2018.
5. On 2.4.2018, pursuant to the Resolution Professionals invitation, fresh
resolution plans were submitted (as both the resolution plans before this were
found to be ineligible) by AMIPL, Numetal, and one other entity, namely
Vedanta Resources Ltd.. On this very date, the NCLT directed that the bids of
the resolution applicants, submitted pursuant to the revised request for
proposal, should not be opened pending adjudication of I.A. No. 98 of 2018
filed by Numetal.
6. On 19.4.2018, the Adjudicating Authority, being the NCLT, passed its
order in all the I.A.s, in which it first held:
21. As per the matter available on the record, a third party contestant,
Arcelor Mittal India Pvt. Ltd., by filing Additional Application No. P-7
of 2018 has also sought for impleading itself in Intervention Application
No. IA 98/2018 the Numetal has filed a Reply opposing such relief as
being sought for by the present Applicant, Numetal Ltd., and in the
present IA and also sought a declaration in its favour to be declared as
eligible for filing a valid resolution plan as on 12.02.2018 thus, it has
opposed the application alleging disability/ineligibility on the part of
M/s. Numetal Ltd., to file a valid and proper resolution plan as on date of
12.02.2018. Since we have not decided the Impleadment Application in
favour of ArcelorMittal by formally impleading it as party in the present
I.A. No. 98 of 2018 and only audience were given to its Learned Counsel
in support of its resolution plan, therefore, we find it appropriate to
confine the issue of determination of eligibility mainly on the reason
which formed a basis for the RP and CoC for not founding eligible for
submission of resolution plan by the resolution applicant, M/s. Numetal
Ltd., and not on additional ground as put forth by the ArcelorMittal.
However, the oral submissions advanced by learned counsel for parties
including the ArcelorMittal duly supported by their Written Submissions
are being taken into consideration for deciding the issue involved in the
present application.
For arriving at such findings/conclusion of the RP has obtained legal
opinion and its such findings is based on such opinion which were
explained to the CoC for reaching to appropriate conclusion/decision.
Equally, the applicant in I.A. No. 98/2018 also obtain legal opinion from
renowned jurists, e.g. (former judge of the hon'ble Supreme Court) and
from former Learned Law Officer of the GOI which are placed on record
along with the present IA also in support of their case in this opinion it is
expressed the Numetal Ltd. (Resolution Applicant) is a single and
independent corporate entity and it cannot be termed as a consortium of
its shareholders not it intend to implement the resolution plan jointly
with another person hence, in view of this the amended Clause 4.11.2(1)
to the RFP would neither be applicable nor binding upon the resolution
applicant and thus, it is not required at all to seek an approval from the
RP or the CoC. In respect of proposed change its shareholding of ESIL in
terms of RET and also are required under the other provisions of the
Law. It has been also emphasised that the Numetal Ltd., is not a SPV
brought into existence merely for the purpose of submitting the
resolution plan in respect of the corporate debtor ESIL as it has recently
entered into an agreement to acquire majority stock in Odisha Slurry
Pipeline Infrastructure Ltd., by an independent contract from the
Resolution Plan. Thus, it cannot be presumed that the applicant is such a
corporate entity which is brought into the existence only for the purpose
of putting forth resolution plan for the ESIL.
Since, there is difference in the legal opinions among the Learned
Luminaries and law firms and more than one views are possible in the
present case to be acted upon then, it cannot be said that there is patently
illegality in the conclusion of the RP or it acted arbitrarily or mala fidely
in rejecting the resolution plan by relying on the legal opinion received
and believed to be true by him and which were placed before the CoC.
Moreover, the RP under the provision of the Code it is expected to make
scrutiny of a resolution plan in conformity with the law of the land and to
take such a prudentdecision which a common man in normal course may
arrive and think just and proper. This court being the Adjudicating
Authority under the Code is not expected to substitute its view upon the
(2021) ABC 17
discretion and wisdom of the RP and CoC to opt for only which a
particular view until and unless it is the case of patent illegality or
arbitrariness.
Therefore, for the aforesaid reason in our prima facie view we do not
find any patent illegality in the decision of the RP for declaring ineligible
to applicants which is a prudent decision where there is possibility of
more than one legal view then this court at this stage is not expected to
substitute its view and to interfere with the conclusion of the RP.
7. It then went on to hold:
19. Thus, the date on which a person stands disqualified would be the
date of commencement of the Corporate Insolvency Resolution Process
of the Corporate Debtor, i.e., ESIL. This date is 02.08.2017 on which
date, ArcelorMittal India Pvt. Ltd., is disqualified in view of the fact that
its connected persons of AM Netherland nd L.N. Mittal are disqualified
as they have an account or an account of the corporate debtor under their
management and control or of whom they are a promoter classified as
NPA under the guidelines of the Reserve Bank of India and at least a
period of one year has lapsed from the date of such classification till the
date of commencement of corporate insolvency resolution process of the
corporate debtor. The said disqualification starts from 02.08.2017 can
only be remedied in the manner provided in the proviso to Clause (c) of
Section 29A read with Section 30(4) proviso and in no other manner.
The disqualification commenced on 02.08.2017 continues till 12.02.2018
and the same disqualification cannot be relieved by merely ceasing to be
the promoter or by selling shares in the companies whose accounts are
NPA such as Uttam Galva or KSS Petron.
20. On perusal of annexure R/4, i.e., shareholding pattern annexed with
the reply of Numetal Ltd., it is found that ArcelorMittal is a publicly
known promoter of Uttam Galva and its shareholding is classified under
"promoter and promoter group" in the filings made in the Stock
Exchange of India. As per shareholding pattern of Uttam Galva disclosed
in the stock exchange as on December, 2017 ArcelorMittal was a single
largest shareholder having significant shareholding of 29.05 % in Uttam
Galva.
21. On perusal of the record it is found that connected person of the
applicant are the promoter of KSS Petron Pvt. Ltd., a company
incorporated under the Companies Act, 1956, having registered office at
Swastik Chamber, 6th Floor, Sion Trombay Road, Chembur, Mumbai
has been NPA for more than a year and CIRP has been initiated against
the KSS Petron vide order dated 01.08.2017 by Mumbai Bench of the
National Company Law Tribunal.
22. It is also pertinent to mention herein that, in the minutes of the
meeting of the committee of creditors which reproduces the decision of
the RP pursuant to the opinions received by the RP from Cyril
Amarchand Mangaldas and Mr. Khambatta. Cyril Amarchand
Mangaldas had opined that AM Netherlands exercised positive control
over Uttam Galva and merely divesting the shareholding prior to the
submission of the resolution plan could not remove the disqualification
under Section 29A(c) of the Code, unless cured by payment.
23. It is an admitted position that AM Netherlands is an indirect 100%
subsidiary of ArcelorMittal Societe Anonyme (AMSA) which is a listed
company incorporated in Luxemburg. On the other hand, AM India is
also an indirect subsidiary (99.99%) of AMSA. Accordingly, AMSA is
promoter, in management and in control of AM India, the resolution
applicant and AM Netherlands is a subsidiary company/associate
company of AMSA in view of which AM Netherlands becomes a
connected person and such connected person has an account of corporate
debtor Uttam Galva under its management, control or of whom such
connected person, namely, AM Netherlands is a promoter is classified as
NPA for more than one year before 02.082017. Consequently, AM India
shall not be eligible to submit a resolution plan as on 12.02.2018.
24. It is an admitted position that Laxminarayan Mittal is controlling AM
India being an indirect subsidiary of AMSA. Accordingly, LN
Mittal/AMSA is promoter in management and in control of AM India,
the resolution applicant, and LN Mittal is also in management and
control of KSS Global BV in view of what is stated above and KSS
Petron which is a 100% subsidiary of KSS Global BV is also under
management and control of LN Mittal. KSS Petron has a NPA for more
than one year and consequently, LN Mittal being a promoter/in control of
KSS Global BV/KSS Petron Pvt. Ltd., is a connected person whose
account is classified non- performing. Consequently, AM India shall not
be eligible to submit a resolution plan.
25. From a bare reading of Section 29A(c) it is very clear that a person
shall not be eligible to submit a resolution plan, if such person, or any
other person acting jointly or in concert with such person; has an
account, or an account of a corporate debtor under the management or
control of such person or whom such person is a promoter, classified as
non-performing asset in accordance with the guidelines of the Reserve
Bank of India issued under the Banking Regulation Act, 1949 (10 of
1949) and at least a period of one year has lapsed from the date of such
classification till the date of commencement of the corporate insolvency
resolution process of the corporate debtor, PROVIDED that the person
shall be eligible to submit a resolution plan if such person makes
payment of all overdue amounts with interest thereon and charges
relating to non-performing asset accounts before submission of
resolution plan.
Section 29A does not distinguish between positive and negative control.
Any person who is either promoter or in the management or in the
(2021) ABC 19
control of the business of the corporate debtor and in default is ineligible.
Person connected to ArcelorMittal India Pvt. Ltd., who are either
promoter or in the management with KSS Petron and Uttam Galva Steels
Ltd., are ineligible. Mere sale of shares and declassification as promoter
after the companies have gone into default cannot be absolved them
responsibility. In order to become eligible, overdue amounts to lenders in
both the cases of KSS Petron and Uttam Galva Steels Ltd., should be
paid by ArcelorMittal before being eligible to bid, as provided in Section
29A itself.
8. Having said this, it then remanded the matter to the Committee of
Creditors as follows:-
27. Further, we are of the view that RP ought to have produced both the
resolution plan before the CoC, along with his comments of eligibility of
both the resolution applicants for consideration of the CoC and to follow
the provision of Section 29A(c) read with Section 30(4) for the purpose
of affording the opportunity to the resolution applicants before declaring
them ineligible. In our view, such procedure has not been followed
hence, it vitiate the proceeding of the CoC and hence the present matter
can be remanded back to the RP and CoC on this ground alone for their
reconsideration.
9. Appeals were filed by both Numetal and AMIPL, on 26.04.2018 and
27.04.2018 respectively, before the Appellate Authority, being the NCLAT.
Before these appeals could be decided, in compliance with the order passed
by the Adjudicating Authority, the Committee of Creditors, after hearing both
AMIPL and Numetal, disqualified AMIPL by an order dated 08.05.2018 as
follows:
48. In wrapping up this post-decisional hearing, we reiterate that AMIL
is an ineligible resolution applicant under Section 29A(c) of the IBC,
who acting in concert with AMBV (the promoter of Uttam Galva on
insolvency commencement date and connected person of AMIL) and
Arcelor Mittal Group in attempting to avoid their obligations to make
payment as provided under Section 29A(c) of mc (sic) with reference to
Uttam Galva and KSS Petron. Their unwillingness to make payment in
the Uttam Galva matter or the KSS Petron matter by their actions of 7th
of February, 2018 and 9th of February, 2018 as stated above is an
avoidance device.
49. In case of Uttam Galva, AMBV arranged the sale of its shareholding
at a nominal value just days prior to the date of submission of the
Resolution Plan is evidence of the fact that AMIL is in concert with
AMBV such action is a manifestation of the passage of Section 29A
under IBC. As promoter of Uttam Galva and as member of the Arcelor
Mittal Group referred above, they should have made payment of the
Overdue Amounts to the lenders of Uttam Galva.
50. The same conduct of Arcelor Mittal Group acting through Fraselli
and KSS Global in terminating the shareholders agreement in KSS
Global, the holding company of KSS Petron, a device has been to avoid
payment of the Overdue Amounts of KSS Petron before filing the
Resolution Plan for ESIL. The close proximity of this action on 9th
February, 2018, one day before the plan submission date is a telling act
of avoidance.
51. Since the CoC have not by themselves filed an appeal over the Ld.
Adjudicating Authoritys order dated 19th April, 2018, the concession
granted by the Ld. Adjudicating Authority to give an opportunity to cure
the ineligibility, we are indicating to AMIL, its connected persona and
persons in concert to cure their disability under Section 29A(c) of IBC by
making a payment to the lenders of Uttam Galva for Overdue Amounts
of Uttam Galva, another payment to the lenders of KSS Petron
constituting Overdue Amounts in KSS Petron and Overdue Amounts of
such other companies which are classified as NPAs and where Arcelor
Mittal Group is a promoter. Such payments will have to be made by
AMIL or its constituents / connected persons no later than 15th May,
2018, especially since the law actually requires that this curative
payment of overdue amounts, interests and charges should be made by
the corporate resolution intending applicant / resolution applicant before
the Resolution Plan is filed. This concession by the CoC is without
prejudice to the CoCs right to strictly enforce the law and provisions of
Section 29A(c) of the IBC. The proof of such payment in form of a No
Overdue Amounts letter (indicative format set out in Annex) shall be
submitted to the RP (with notification to the CoC) by 6:00 P.M. IST on
15th May 2018. As we have limited time available under the CIR process
of ESIL, AMIL is requested to adhere to these timelines.
10. By another order of the same date, the Committee of Creditors
disqualified Numetal as follows:
44. Numetal and AEL are related as an associate company, on account of
the fact that AEL (alias Rewant Ruia) has significant influence over
Numetal pursuant to its control of at least 20% of the total voting power
of Numetal. Since an associate company is considered as a related party
to a resolution applicant where such resolution applicant and other
persons are acting jointly or in concert, Numetal is clearly said to be
acting jointly and in concert with AEL. This in turn means Numetal is
acting in concert with Mr. Rewant Ruia and hence with Mr. Ravi Ruia,
the promoter and guarantor of ESIL (a non-performing asset since 2016).
This inflicts a disability and ineligibility upon Numetal / its consortium
and constituent shareholders. xxx xxx xxx
57. Thus in wrapping up the post decisional hearing, we reiterate that
Numetal is an ineligible resolution applicant acting in concert with
Rewant Ruia and his connected person namely his relative / father Ravi
(2021) ABC 21
Ruia, who is a promoter of a corporate debtor ESIL, which has a non-
performing asset account.
58. Since the CoC have not by themselves filed an appeal over the Ld.
Adjudicating Authoritys Order dated 19th April, 2018, the concession
granted by the Ld. Adjudicating Authority to give an opportunity to cure
the ineligibility, we are indicating to the resolution applicant, i.e.
Numetal and the consortium of Crinium Bay, Indo, TPE and AEL as
persons acting in concert with Numetal, that they would be eligible only
if they make payment of (i) the Overdue Amounts constituting NPA in
ESIL as on 30th April, 2018 aggregating to Rs. 37,558.65 crores in
principal and interest and Rs. 1,688.27 crores in penal interest and other
charges and such other additional Overdue Amounts which have accrued
till the date of payment; and (ii) the Overdue Amounts of such other
companies which are classified as NPAs and where Mr. Ravi Ruia / Mr.
Rewant Ruia are promoters. Such payments will have to be made by
Numetal or its constituents / consortium no later than 15th May, 2018,
especially since the law actually requires that this curative payment
should be made before the resolution plan is filed. This concession is
without prejudice to the CoCs right to strictly enforce the law and the
provisions of Sections 29A(c) and 29A(h) of IBC. The proof of such
payment in form of a no-Overdues Amounts letter (indicative format set
out in Annex 3) shall be submitted to the RP (with notification to CoC)
by 6:00 P.M. IST on 15th May 2018, As we have limited time available
under the CIR process of ESIL, Numetal is requested to adhere to these
timelines.
11. In the appeals that were filed before it, the Appellate Authority, insofar
as Numetals Resolution plan was concerned, vide an order dated 07.09.2018
held as follows:-
44. On behalf of AM India Ltd., it was submitted that VTB Bank one of
the shareholders of Numetal Ltd. is ineligible in view of Article 5(c) of
the EU Regulations of 2014. Though such submission has been made, no
order or evidence has been placed on record to suggest that any order of
prohibition was imposed by the European Union against the VTB Bank.
Neither the date of order nor order passed by any competent authority or
court of law has been placed on record.
45. On the other hand, it will be evident that Council of European Union
adopted Council Regulation (EU) No. 833/2014 concerning Restricting
measures in view of Russia action. In fact, in view of situation in
Ukraine, the European Union Regulation was adopted. Apart from the
aforesaid fact, that AM India Ltd. has not brought on record any penal
order passed by any court of law relating to disability, if any, which is
corresponding to any of the disability shown in Clauses (a) to (h) of
Section 29A. Therefore, the stand taken by the AM India Ltd. with
regard to ineligibility of VTB Bank is fit to be rejected.
xxx xxx xxx Resolution Plan submitted by the Numetal Ltd. on 12th
February, 2018
60. As on 12th February, 2018, when the 1st Resolution Plan was
submitted by Numetal Ltd., it had four shareholders.
(i) Crinium Bay: 40%
(ii) Indo: 25.1%
(iii) TPE: 9.9%
(iv) AEL: 25%
61. Admittedly, Mr. Rewant is 100% shareholder of AEL and AEL held
25% in Numetal Ltd. even as on 12th February, 2018, Mr. Rewant being
son of Mr. Ravi, who is the promoter of the Corporate Debtor, we hold
that AEL is a related party and comes within the meaning of person in
concert in terms of Regulation 2(1)(q).
62. In view of the aforesaid findings, we hold that at the time of
submission of 1st Resolution Plan by Numetal Ltd., one of the
shareholders being AEL, Numetal Ltd. was not eligible to submit
Resolution Plan in terms of Section 29A.
Position of Numetal Ltd. as on 29 th March, 2018 when the subsequent
Resolution Plan was submitted by Numetal Ltd..
63. The Committee of Creditors had extended the period for submitted a
fresh Resolution Plan by 2 nd April, 2018. Numetal Ltd. filed fresh
Resolution Plan on 29th March, 2018. On the said date the Numetal Ltd.
consisted of the three shareholders: -
(a) Crinium Bay (VTB): 40%
(b) Indo: 34.1%
(c) TPE: 25.9%
64. As on 29th March, 2018, as the AEL was not the shareholder of
Numetal Ltd. and all the three shareholders aforesaid being eligible, we
hold that Numetal Ltd. in respect of the Resolution Plan dated 29th
March, 2018, is eligible and the provision of Section 29A, as on 29th
March, 2018 is not attracted to the Numetal Ltd.. For the reasons
aforesaid, we are of the view that the Resolution Plan submitted by
Numetal Ltd. on 29th March, 2018 is required to be considered by the
Committee of Creditors to find out its viability, feasibility and financial
matrix.
12. In the same order, insofar as AMIPLs resolution plan was concerned, the
Appellate Authority held as follows:
107. In the present case, the Expression of Interest was submitted by AM
India Ltd. on 11th October, 2017 and by Numetal Ltd. on 20 th October,
2017, both prior to 23rd November, 2017 i.e. the date Section 29A was
inserted by the Insolvency and Bankruptcy Code (Amendment)
(2021) ABC 23
Ordinance, 2017 but the Resolution Plans were submitted by both AM
India Ltd. and Numetal Ltd. on 12th February, 2018.
108. The question arises for consideration is as to what will be the
position if, on the basis of Information Memorandum the Expression of
Interest is submitted by the Resolution Applicants prior to 23 rd
November, 2017 and whether they are eligible to take advantage of 2nd
proviso to sub-section (4) of Section 30.?
109. Section 29A came into force on 23rd November, 2017. Those who
submitted Resolution Plan prior to the said date and if covered by clause
(c) of Section 29A are entitled to derive benefit of second proviso to sub-
section (4) of Section 30. Under I&B Code there is no provision to
submit Expression of Interest prior to Resolution Plan. What we find
from the invitation seeking Expression of Interest to submit a Resolution
Plan for Essar Steel Limited published on 6th October, 2017 is the first
stage of Resolution Plan.
Therefore, we hold that Expression of Interest is part of the Resolution Plan,
which follows the Resolution Plan. In such case, the date of submission of the
Expression of Interest should be treated to be the date of submission of the
Resolution Plan. In this background, we hold that the date of submissions of
the 1st Resolution Plan(s) of AM India Ltd. and Numetal Ltd. will be deemed
to be 11th October, 2017/12th February, 2018 and 20th October, 2017/12th
February, 2018 respectively.
110. If the aforesaid proposition is not accepted, it will deprive the
Resolution Applicants from deriving advantage of second proviso to sub-
section (4) of Section 30 inserted on 23rd November, 2017, even though
they acted to submit the Resolution Plan by submitting the Expression of
Interest of Resolution Plan.
111. In view of the aforesaid finding, we hold that the Adjudicating
Authority rightly held that the Appellant- AM India Ltd. should have
been given the opportunity by the Committee of Creditors in terms of
second proviso to sub-section (4) of Section 30.
112. The question arises for consideration is whether the AM
Netherlands is eligible, having transferred its entire shareholding of
Uttam Galva on 7th February, 2018 and by transferring of its entire
shareholding of Fraseli in KSS Global on 9th February, 2018 i.e. two to
four days prior to the submission of Expression of Interest (first phase of
Resolution Plan).
113. Proviso to clause (c) of Section 29A reads as follows:
Provided that the person shall be eligible to submit a resolution plan if
such person makes payment of all overdue amounts with interest thereon
and charges relating to non-performing asset accounts before submission
of resolution plan
114. The aforesaid proviso to Clause (c) makes it clear that the person
shall be eligible to submit a Resolution Plan if such person makes
payment of all overdue amounts with interest thereon and charges
relating to non-performing asset accounts before submission of
Resolution Plan. It does not stipulate any other mode to become eligible
and thereby does not prescribe any other mode to become ineligible,
including by selling the shares thereby existing as a member of the
Company whose account has been classified as non- performing asset
accounts in accordance with the guidelines of the Reserve Bank of India.
115. Second proviso to sub-section (4) of Section 30 also stipulates, as
follows:
30. Submission of resolution plan. (4) xxx xxx xxx Provided further that
where the resolution applicant referred to in the first proviso is ineligible
under Clause (c) of Section 29A, the resolution applicant shall be
allowed by the committee of creditors such period, not exceeding thirty
days, to make payment of overdue amounts in accordance with the
proviso to Clause (c) of Section 29A
116. From both the aforesaid provisions, it is clear that except in the
manner the Resolution Applicants can make it eligible and get rid of
ineligibility under Clause (c) of Section 29A that is by making payment
of all overdue amounts in accordance with the proviso to Clause (c) of
Section 29A, no other manner a person, who is otherwise ineligible
under Clause (c) of Section 29A, can become eligible. There is no
provision in the I&B Code which permits an ineligible person to become
eligible by selling or transferring its shares of the Company whose
accounts have been declared as NPA in accordance with the guidelines
of Reserve Bank of India.
117. Admittedly, AM Netherlands is related party of AM India Ltd. AM
Netherlands was the promoter of Uttam Galva on the date when the
Uttam Galva classified as NPA in accordance with the guidelines of
Reserve Bank of India and a period of one year has elapsed from the date
of such classification, at the time of commencement of Corporate
Insolvency Resolution Process of the Corporate Debtor.
118. Once the stigma of classification of the account as NPA has been
labelled on the promoter of the Uttam Galva, even after sale of shares by
AM Netherlands it may ceased to be a member or promoter of the Uttam
Galva, but stigma as was attached with it will continue for the purpose of
ineligibility under clause (c) of Section 29A, till payment of all overdue
amount with interest and charges relating to NPA account of the Uttam
Galva is paid.
119. AM Netherlands is 100% subsidiary of AMSA which is a listed
company incorporated in Luxemburg. AM India Ltd. is also a subsidiary
of AMSA having 99.99% shareholding in it. Accordingly, AMSA is also
a promoter, in the management and in control of AM India Ltd. Fraseli is
(2021) ABC 25
a company owned and controlled by a company called by Mittal
Investments acquired about one third of the share capital of KSS Global
BV. Pursuant to such acquisition, Fraseli acquired control over KSS
Global BV which in turn controls KSS Petron and Petron Engineering.
Mittal Investments is owned and controlled by LN Mittal Group, the
promoters of the AM India Pvt. Ltd.
120. AM India Ltd. divested its shareholding in KSS Global BV which is
100% owner of KSS Petron (a Company whose account has been
declared as NPA). AM India Ltd. has its control over it will be evident
from the fact that it has nominee Directors, who also resigned on 9th
February, 2018 i.e. 3 days before submission of the Expression of
Interest of Resolution Plan by AM India Ltd. This will be also clear from
the fact that the AM India Ltd. was nothing that an entity controlling and
managing in KSS Global BV (which is 100% owner of KSS Petron an
NPA Company) divested its shareholding in KSS Global BV on 9th
February, 2018 i.e. 3 days before submission of the Expression of
Interest of Resolution Plan.
121. We have also noticed that consequent to such acquisition of control
by Fraseli, on 23rd May, 2011 a public announcement was made under
SEBI (Substantial Acquisition of Shares and Takeover) Regulations,
1997 for the acquisition of shares of Petron Engineering inter alia by
KSS Global BV and Fraseli. Therefore, we hold that Mr. L.N. Mittal
Group, a connected person of AM India Ltd. being the promoter and in
the control and management of KSS Petron since 2011 and KSS Petron
having classified as NPA by multiple banks, the stigma attached to it
cannot be cleared by KSS Global by divesting its shares in KSS Petron
on 9th February, 2018 and the stigma will continue for the purpose of
ineligibility under clause (c) Section 29A, till the payment of all overdue
amount with interest thereon and charges relating to NPA account of
KSS Petron.
122. Admittedly, there are three nominee Directors of AM India Ltd. in
KSS Petron, one of the NPA Company. The nominee Directors of the
Appellant- AM India Ltd. had also resigned on 9 th February, 2018 i.e.
three days before the submission of the Resolution Plan. Therefore, it is
clear that the AM India Ltd. had complete control over the KSS Petron.
123. It is informed that after impugned order passed by the Adjudicating
Authority, the AM India Ltd. had made conditional deposit of Rs. 7,000
Crores in its own current account (Escrow Account). Such depositation
of the amount in its own Escrow Account does not qualify as a payment
of overdue amounts in terms of proviso to clause (c) of Section 29A. A
conditional offer to pay the over dues amount cannot be accepted till it is
complied in the light of proviso to clause (c) of Section 29A
unconditionally.
124. Dr. Abhishek Manu Singhvi, learned Senior Counsel appearing on
behalf of AM India Ltd. when asked, on instruction, submitted that if this
Appellate Tribunal accept the Resolution Plan submitted by the AM
India Ltd., it may deposit the non-performing assets amount with interest
in the respective accounts which were declared as NPA in accordance
with the guidelines of the Reserve Bank of India.
125. As we hold that AM India Ltd. is also entitled to the benefit of
second proviso to sub-section (4) of Section 30, we give one opportunity
to the Resolution Applicant- AM India Ltd. to make payment of all
overdue amount with interest thereon and charges relating to Non
Performing Accounts of both the Uttam Galva and the KSS Petron in
their respective accounts within three days i.e. by 11 th September, 2018.
If such amount is deposited in the accounts of both Non-Performing
Accounts of Uttam Galva and KSS Petron within time aforesaid and is
informed, the Committee of Creditors will consider the Resolution Plan
submitted by AM India Ltd. along with other Resolution Plans, including
the Resolution Plan submitted by the Numetal Ltd. on 29th March, 2018,
and if so necessary, may negotiate with the Resolution Applicant(s). An
early decision should be taken by the Committee of Creditors and on
approval of the Resolution Plan, the Resolution Professional will place
the same immediately before the Adjudicating Authority who in its turn
will pass order under Section 31 in accordance with law. The Successful
Resolution Applicant will take steps for execution of its Resolution Plan
and deposit the upfront money if proposed, in terms of the Resolution
Plan.
126. Taking into consideration the fact that a long period has taken due
to pendency of the case before the Adjudicating Authority and thereafter,
before this Appellate Tribunal, we direct the djudicating Authority to
exclude the period the appeal was pending before this Appellate Tribunal
i.e. from 26th April, 2018 till today (7th September, 2018) for the
purpose of counting the total period of 270 days. The impugned order
dated 19th April, 2018 passed by the Adjudicating Authority so far as it
relates to eligibility of Numetal Ltd. as on the date of the submission of
the Resolution Plan dated 29th March, 2018 is set aside. The impugned
judgment/order in respect to AM India Ltd. is affirmed with conditions
as mentioned in the preceding paragraphs. All the appeals are disposed of
with aforesaid observations and directions. The parties will bear their
respective cost.
13. This is how both AMIPL and Numetal are before us in appeals from the
Appellate Authoritys order dated 07.09.2018.
14. Shri Harish N. Salve, Learned Senior Advocate appearing on behalf of
AMIPL, argued that Section 29A, as originally enacted, disqualified a person
who has an account of a corporate debtor under the management or control of
such person, or of whom such person is a promoter, which account was
(2021) ABC 27
declared as a non- performing asset. The further condition is that one year
should have elapsed from the date of such declaration till the date of
commencement of the corporate insolvency resolution process of the
corporate debtor. Thus, a plain reading of the same establishes that the
ineligibility under Section 29A is in relation to the submission of a resolution
plan, which must consist of the elements set out in Section 30. Responding to
preliminary enquiries, i.e., an expression of interest, is not the subject matter
of a resolution plan, and therefore, the relevant time is the time of submission
of a resolution plan. He further argued that the amendment made to Section
29A in June, 2018, expressly stating that the relevant time was the time of
submission of a resolution plan, is clarificatory in nature. Once this becomes
clear, everything on facts falls into place. According to the learned Senior
Advocate, AMIPL is an indirect subsidiary of one ArcelorMittal Societe
Anonyme (hereinafter referred to as AMSA), which is a listed company in
Luxemburg. AMSA holds 100% shares in one ArcelorMittal Belvel &
Differdange Societe Anonyme (hereinafter referred to as AMBD), a company
incorporated in Luxemburg, which in turn holds 100% in one Oakey Holding
BV, a company incorporated in the Netherlands, which in turn holds 99.99%
shares in AMIPL. ArcelorMittal Netherlands BV (hereinafter referred to as
AMNLBV), which is a member of the L.N. Mittal Group incorporated in the
Netherlands, is 100% held by AMSA the Chairman and CEO of AMSA being
Shri L.N. Mittal). AMNLBV held 29.05% in one Uttam Galva Steels Limited
(hereinafter referred to as Uttam Galva) which is an Indian company, listed in
India. Uttam Galva was declared as a non-performing asset on 31.03.2016,
with a debt of around Rs. 6000 crores. According to Shri Salve, Uttam Galva,
though it entered into a Co-Promotion Agreement with AMNLBV on
4.9.2009, was really promoted by the Miglani Group of businessmen who are
Indian citizens residing in Mumbai. The Co- Promotion Agreement conferred
on AMNLBV the right to appoint 50% of the non-independent directors on
the board, as well as certain affirmative voting rights. This required that the
Articles of Association be amended, which was never in fact done. In 2015
itself, AMNLBV had written off the investment in Uttam Galva from its
books, seeking an exit from Uttam Galva at this time. AMNLBV never
appointed any director or exercised any voting rights in Uttam Galva. What is
important to note is that it had transferred its entire shareholding in Uttam
Galva on 07.02.2018 to one Sainath Trading Company Private Limited, which
was a Miglani Group Company, for Re.1 per share (having purchased the
shares at Rs.120 per share). The depository participant account of AMNLBV
ceased to show the said shares with effect from 07.02.2018. The Co-
Promotion Agreement dated 4.9.2009, pursuant to which the status of
promoter had been conferred on AMNLBV, stood automatically terminated
vide clause 21.6 thereof on 07.02.2018. In order to put the matter beyond any
doubt, the parties also executed a Co-Promotion Termination Agreement on
07.02.2018. On 08.02.2018, Uttam Galva filed the necessary forms with the
Registrar of Companies and made the necessary disclosures with the National
Stock Exchange and Bombay Stock Exchange to declassify AMNLBV as a
promoter of Uttam Galva. This was accordingly done on 21.03.2018 and
23.03.2018 before the NSE and BSE respectively. Such declassification,
being a ministerial act, is relatable to the date of sale of shares, i.e.,
07.02.2009, and considered effective from the said date. Inasmuch as
AMNLBV therefore ceased to be a promoter in Uttam Galva prior to
12.02.2018, the resolution plan is not hit by Section 29A(c). Similarly,
according to the learned Senior Advocate, insofar as KSS Petron Private
Limited (hereinafter referred to as KSS Petron) is concerned, it is an admitted
case that Fraseli Investments Sarl (hereinafter referred to as Fraseli) is a
company owned and controlled by one Mittal Investments Sarl, which in turn
is owned and controlled by the L.N. Mittal Group, the promoters of AMIPL.
Fraseli held 32.22% in one KazStroy Service Global BV (hereinafter referred
to as KSS Global), a company incorporated in the Netherlands which in turn
held 100% of KSS Petron, an Indian company. The shareholders agreement
entered into between Fraseli and KSS Global permitted Fraseli to appoint two
out of six nominee directors in KSS Global, and provided for an affirmative
vote of shareholders with respect to certain matters. According to the Learned
Senior Advocate, if the definition of control in Section 2(27) of the
Companies Act, 2013 is applied, the relationship of KSS Global with KSS
Petron would not constitute control over the wholly owned subsidiary in
India. In any case, the entire shareholding of Fraseli in KSS Global was
transferred back to the promoters of KSS Global on 09.02.2018, i.e., 3 days
before submission of the resolution plan. KSS Petron has been classified as a
non-performing asset by multiple banks, and the corporate insolvency
resolution process was initiated against it on 01.08.2017 before the NCLT. It
may be added that KSS Petron was declared a non-performing asset on
30.9.2015 with a debt of around Rs. 1000 crores. The Learned Senior
Advocate therefore attacked the finding of the Appellate Authority on this
score, and stated that, as Section 29A was not attracted, the question of paying
off the debts of Uttam Galva and KSS Petron would not arise.
15. When it came to Numetals resolution plan, the Learned Senior Advocate
argued that it is important to remember that Numetal was incorporated on
13.10.2017 by Shri Rewant Ruia, son of Shri Ravi Ruia (who was a promoter
of the corporate debtor of ESIL), with the specific objective of trying to
acquire ESIL. At the time of its incorporation, one Aurora Enterprises Limited
(hereinafter referred to as AEL), a Ruia Group Company, held 100%
shareholding of Numetal. In turn AELs 100% shareholding was held by one
Aurora Holdings Limited (hereinafter referred to as AHL), 100% of whose
shareholding was held by Shri Rewant Ruia, who was a former director of the
corporate debtor, i.e. ESIL. On 18.10.2017, a few weeks before Section 29A
was introduced, AEL transferred 26.1% of its shares in Numetal to one Essar
Communications Limited (hereinafter referred to as ECL), a group company
of the corporate debtor. On 19.10.2017 Shri Rewant Ruia settled an
irrevocable discretionary trust, called the Crescent Trust, which purchased the
(2021) ABC 29
shares of AHL at par value. On 20.10.2017, when Numetal submitted its
expression of interest, it had two share holders, i.e., AEL (holding 73.9%) and
ECL (holding 26.1%). On 22.11.2017, when the Finance Minister made a
statement that the Code would be amended in order to prevent unscrupulous
persons from submitting resolution plans, AEL transferred 13.9% of its
shareholding in Numetal, and ECL its entire 26.1% shareholding, to one
Crinium Bay Holdings Limited (hereinafter referred to as Crinium Bay), a
100% indirectly held subsidiary of one VTB Bank, which in turn was a
Russian company, the majority of whose shares were held by the Russian
Government. Crinium Bay thus became the owner of 40% of the shareholding
of Numetal. AEL subsequently transferred 25.1% of the shareholding in
Numetal to one Indo International Trading FZCO (hereinafter referred to as
Indo), a Dubai company, and 9.9% of the shareholding to one JSC VO
Tyazhpromexport (hereinafter referred to as TPE), a Russian company. AEL
was left with only a 25% shareholding in Numetal. Even this holding in
Numetal was ultimately divested on 29.3.2018, so that Crinium Bay held
40%, TPE held 25.9% and Indo held 34.1% in Numetal, with AELs holding
becoming Nil. Shri Salve has argued that Numetal is hit by Section 29A(i) of
the Code, as VTB Bank, the parent of Crinium Bay, stands prohibited from
accessing the securities markets in the European Union pursuant to an order
dated 31.7.2004, and in the United States by two orders. This being the case,
Numetal is directly hit by sub-section (f) read with sub-section (i) of Section
29A. It is also hit by Section 29A(j) as Crinium Bay, being a subsidiary of
VTB Bank, becomes a connected person as defined under sub-clauses (i) and
(iii) of Explanation 1 to Section 29A(j). One very important fact that was
stressed by him was that an amount of Rs. 500 crores was given by AEL to
Numetal so that it could deposit the requisite earnest money that had to be
made along with the resolution plan furnished by Numetal. This amount, that
was admittedly furnished by AEL, continues to remain with the Resolution
Professional, and has till date not been withdrawn by AEL, showing that Shri
Rewant Ruia continues to be vitally interested and linked with the resolution
plan of Numetal, even after the complete exit of AEL as its shareholder. He
therefore submitted that, given these facts, hereas AMIPL should have been
held eligible, it was wrongly held to be ineligible by the Appellate Authority;
and that Numetal, being clearly hit by several provisions of Section 29A, was
wrongly held to be eligible. He stressed the fact that one of the core objectives
of Section 29A was to ensure that the promoter of the corporate debtor should
not through or by circular means come back in order to regain the company
that he himself had run to the ground. For this purpose, he relied upon the
Finance Ministers statement on 29.12.2017, while introducing the Bill to
amend the Code by introducing Section 29A, together with the Statements of
Objects and Reasons appended to the said Bill.
16. Dr. A.M. Singhvi, Learned Senior Advocate, supported the arguments of
Shri Salve. According to him, Section 29A(c) always had the application of
the resolution plan date as the relevant date, given the in praesenti has which
is also there in Clauses (h) and (j), and is similar to the expression is which is
to be found in Clauses (a), (b), (e) and (f), as contrasted with the expression
has been used in Clauses (d) and (g), of Section 29A. According to him, the
amendment made in 2018 is in any case clarificatory in nature. He supported
the attack of Shri Salve on the Appellate Authoritys judgment, stating that so
far as Uttam Galva is concerned, it is well established that the sale of shares is
complete once they move out of the demat account of the seller, which in this
case took place five days before 12.02.2008. For this he cited certain
judgments. He also supported Shri Salves argument by stating that Numetal is
clearly disqualified under several clauses of Section 29A.
17. On the other hand, Shri Mukul Rohatgi, Learned Senior Advocate,
appearing on behalf of Numetal, stated that Numetal was a company which
was therefore a separate person in law from its shareholders. He contended
that on the date of submission of the resolution plan (i.e., 12.02.2018), AEL
held only 25%, which would be below the figure of 26% mentioned in the
request for proposal dated 24.12.2017, wherein control has been defined as a
person holding more than 26% of the voting share capital in the company.
According to him, in any case by 02.04.2018, when it submitted a fresh
resolution plan, AEL had walked out completely, leaving behind two Russian
companies holding 40% and 25.9% respectively of Numetal, and Indo, a
Dubai Company, holding 34.1%. According to the learned Senior Advocate,
Numetal cannot possibly be described as a joint venture of its shareholders,
and for this purpose he cited some of our judgments. According to him, a joint
venture is a contractual arrangement whereby two or more parties undertake
an economic activity which is subject to joint control, which is missing in the
present case as a shareholder in a company is distinct from the company itself.
He added that Section 29A(c) requires that Numetal as a person, together with
any other person acting jointly or in concert, has to have an account of a
corporate debtor under its management or control, or of whom such person is
a promoter (which is classified as a non- performing asset for a period of at
least one year before the date of commencement of the corporate insolvency
resolution process of the corporate debtor). According to the Learned Senior
Advocate, Shri Rewant Ruia would not fall within any of these categories, on
a reading of Section 2(27) of the Companies Act, 2013, which defines control;
Section 2(69) of the Companies Act, 2013, which defines promoter; and
Sections 2(53) and 2(54) of the Companies Act, 2013, which define manager
and managing director respectively. He emphatically argued that though Shri
Rewant Ruia is the son of Shri Ravi Ruia, who is a promoter of the corporate
debtor, and though he may be deemed to be a person acting in concert within
the definition contained in Regulation 2(1) (q) of the SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 2011 (hereinafter referred
to as the 2011 Takeover Regulations), yet, he cannot be considered to be a
connected person under Section 29A(j) of the Code. This is for the reason that
under Explanation 1 to Section 29A(j), the expression connected person can
only mean a related party or a person who is referred to in sub-clauses (i) and
(2021) ABC 31
(ii) of Explanation 1, and since Shri Rewant Ruia is neither a promoter of nor
in the management or control of the resolution applicant Numetal, he would
fall outside of sub-clause (iii) of Explanation 1. According to Shri Rohatgi,
the Appellate Authority was absolutely correct in saying that Numetal would
not be ineligible under Section 29A. He strongly attacked Shri Salves
argument that VTB Bank, the holding company of Crinium Bay, was barred
from accessing the securities market by either the European Union or the
United States. He took us to the original orders and argued that the document
of the European Union, being Council Regulation 833 of 2014 dated
31.07.2014, pursuant to Article 215 of the Treaty on the Functioning of the
European Union, was owing to restrictive measures taken in view of Russias
actions destabilizing the situation in Ukraine. Because Russia had illegally
annexed Crimea, political sanctions were imposed by this document, which
cannot possibly be said to be sanctions imposed by an authority equivalent to
SEBI in India. The sanctions also did not relate in any manner to the securities
market. Equally, insofar as the two orders of the United States are concerned,
they were also political sanctions imposed against Russian companies for the
same reason by the Office of Foreign Assets Control by a Presidential Order.
He even argued that insofar as the European Union is concerned, the
corresponding authority to SEBI is the European Securities and Market
Authority, whereas in the United States it would be the Securities Exchange
Commission, neither of whom has issued any sanctions which would interdict
VTB Bank from accessing or trading in the securities market. He also
countered Shri Salves submission that the Rs. 500 crores that was advanced
by AEL and given as earnest money for the resolution plan was not yet
withdrawn, contending that this was so because the validity of the first bid by
Numetal continues to be sub judice.
18. Shri Rohatgi then attacked AMIPL by stating that even a literal reading
of Section 29A(c) would make it clear that in the case of Uttam Galva,
AMNLBV, which is admittedly an L.N. Mittal Group Company, was directly
covered by sub-clause (c) as it had been shown as a promoter in the annual
reports of Uttam Galva, and would therefore fit the definition of promoter
contained in Section 2(69) of the Companies Act, 2013. What is of great
importance, and what is in fact not disclosed, is that a Non- Disposal
Undertaking was issued to the State Bank of India, the secured creditor of
Uttam Galva, on 12.07.2011 by AMNLBV, agreeing that it would not sell,
transfer or dispose of any shares held by it without the consent of the lenders
of Uttam Galva. According to Shri Rohatgi, therefore, the transfer of these
shares, the recognition of such transfer by Uttam Galva, and the consequent
application to the Stock Exchanges for declassification as promoter, without
obtaining the consent of the State Bank of India, is invalid in law and a fraud
played by AMNLBV. Further, in the disclosures that were made under the
2011 Takeover Regulations, the column relatable to the existence of any non-
disposal undertakings was left blank. In addition, since a sale of shares
between co-promoters inter se is exempted from the requirement of making a
public offer under Regulation 3(1) read with Regulation 10(1)(a)(2) of the
2011 Takeover Regulations, it is clear that on the one hand promoter status is
claimed in order to avail of the regulation, whereas, in the present case, it is
argued that, in substance, AMNLBV is not in fact a promoter. Equally,
leaving a blank in the form against the column which required disclosure of
non-disposal undertakings, is a fraud played on SEBI, and on the shareholders
of Uttam Galva; as otherwise, in the public offer that would have had to be
made, the shares of Uttam Galva would have had to be purchased at the
higher price that is mentioned in the said Regulations. Incidentally, according
to Shri Rohatgi, in any case, getting out of Uttam Galva by paying a price of
Re.1 per share when the market value on that date was Rs.19.50 per share is
again a fraudulent transaction, which cannot possibly pass muster under
Section 29A. Further, insofar as KSS Petron is concerned, it is clear that
Fraselis holding of 32.22% in KSS Global would certainly amount to de facto
control, if not de jure control, of KSS Petron, its wholly owned subsidiary, as
defined under Section 2(27) of the Companies Act, 2013. The transfer of
Fraselis shareholding on 09.02.2018, before submission of the resolution plan
on 12.02.2018, is again a dubious and fraudulent act squarely hit by Section
29A. Shri Rohatgi further argued that Shri Pramod Mittal, brother of Shri
L.N. Mittal, is a connected person, which would trigger Section 29A(j). Shri
Pramod Mittal is a promoter and director of one Gontermann Piepers (India)
Limited, which has also been declared an NPA, rendering Shri L.N. Mittal
ineligible under Section 29A(j). Equally, Shri L.N. Mittal, Shri Pramod Mittal
and other members of the Mittal family are promoters of one Ispat Profiles
India Limited. This company was ordered to be wound up by the BIFR,
appeals from which have been dismissed by the AAIFR. Consequently, Shri
L.N. Mittal, as a related party of Shri Pramod Mittal, would render AMIPL
ineligible under sub-clause (c) read with sub-clause (j) of Section 29A of the
Code.
19. Shri Gopal Subramanium, Learned Senior Advocate appearing on behalf
of the Committee of Creditors, has placed before us the Insolvency and
Bankruptcy Code (Amendment) Ordinance, 2017, introducing Section 29A,
and commented on the difference between the opening lines of the said
Ordinance as compared with those of the Amendment Act of 2017. The
Amendment Act of 2017 brings in persons acting in concert. According to the
learned senior counsel, persons acting in concert has been dealt with by the
Justice P.N. Bhagwati Committee Report on Takeovers, 1997, which he read
out to us in copious detail. He also referred to some of our judgments on
tearing the corporate veil, and on persons acting in concert. According to him,
there should be no interference by the appropriate authority at the behest of a
resolution applicant at the stage of a Resolution Professional processing
resolution applications, and the subsequent stage of a Committee of Creditors
disapproving a resolution plan. According to him, the period of 270 days is a
watertight compartment, within which either a resolution plan will be
approved, or the corporate debtor be wound up. According to him, the
(2021) ABC 33
practice of interlocutory applications being filed at anterior stages of the
proceedings before the Adjudicating Authority, and orders of remand to the
Committee of Creditors, should be stopped. However, the time taken by the
Adjudicating Authority and the Appellate Authority in deciding disputes that
may arise before them should be excluded from the computation of 270 days
as aforesaid. According to the Learned Senior Advocate, the expressions
persons acting in concert and control are broad enough to bring all associated
persons within the dragnet of Section 29A. He cited a number of judgments
on how this provision should be construed in accordance with the object
sought to be achieved by the said provision, which should never be stultified
or defeated, so as to get to the real state of affairs of the facts of every given
case. Therefore, it is very important to remember that phrases such as persons
acting in concert and control are meant not only to pierce the corporate veil,
but also to get to the real persons who present resolution plans. On the facts of
each case, according to Shri Subramanium, both resolution plans were
correctly rejected by the Resolution Professional and the Committee of
Creditors, as they were both hit by the provisions of Section 29A. Any
circular method, by which payment of debts of an NPA of a person acting
jointly or in concert under the proviso to Section 29A(c) is sought to be
avoided, should be interdicted. According to the Learned Senior Advocate,
both resolution plans are hit by Section 29A(c), and the only way out is for
both resolution applicants to pay up the debts of the respective NPAs of the
corporate debtors who are associated with them.
20. Shri K.V. Viswanathan, learned Senior Advocate, appearing on behalf of
the Resolution Professional, drew our attention to the Insolvency and
Bankruptcy Board of India (Insolvency Resolution Process for Corporate
Persons) Regulations, 2016 (hereinafter referred to as the CIRP Regulations),
and stated that the role of the Resolution Professional is essentially to do a
due diligence on each resolution plan submitted before it. It is only after such
due diligence is done that this plan is to be forwarded to the Committee of
Creditors. According to him, even if it is found that the resolution plan in
question contravenes any law, such finding would only be a tentative opinion
formed by the Resolution Professional, who has to submit the plan to the
Committee of Creditors once it is complete in all respects. According to him,
a conjoint reading of Section 25(2)(i) of the Code, read with Section 30(3)
and the second proviso to Section 30(4), would necessarily lead to this
conclusion. Also, according to the learned Senior Advocate, the expression
control contained in Section 29A(c) should be construed noscitur a sociis with
the word management, and so construed, would only mean positive, de facto,
control of such person.
21. At this point, it is necessary to first set out Section 29A in its various
forms: as first introduced by the Insolvency and Bankruptcy Code
(Amendment) Ordinance, 2017 and the Insolvency and Bankruptcy Code
(Amendment) Act, 2017, together with the amendment made by the
Insolvency and Bankruptcy Code (Second Amendment) Act, 2018. Section
29A, as introduced by the Insolvency & Bankruptcy Code (Amendment)
Ordinance, 2017, on 23.11.2017, reads as follows:
29A.A person shall not be eligible to submit a resolution plan, if such
person, or any other person acting jointly with such person, or any person
who is a promoter or in the management or control of such person,-
(a) is an undischarged insolvent;
(b) has been identified as a wilful defaulter in accordance with the
guidelines of the Reserve Bank of India issued under the Banking
Regulation Act, 1949 (10 of 1949);
(c) Whose account is classified as non-performing asset in accordance
with the guidelines of the Reserve Bank of India issued under the
Banking Regulation Act, 1949 (10 of 1949) and period of one year
or more has lapsed from the date of such classification and who has
failed to make the payment of all overdue amounts with interest
thereon and charges relating to non- performing asset before
submission of the resolution plan;
(d) Has been convicted for any offence punishable with imprisonment
for two years or more; or
(e) Has been disqualified to act as a director under the Companies Act,
2013 (18 of 2013);
(f) Has been prohibited by the Securities and Exchange Board of India
from trading in securities or accessing the securities markets;
(g) Has indulged in preferential transaction or undervalued transaction
or fraudulent transaction in respect of which an order has been made
by the Adjudicating Authority under this Code;
(h) Has executed an enforceable guarantee in favour of a creditor, in
respect of a corporate debtor under insolvency resolution process or
liquidation under this Code;
(i) Where any connected person in respect of such person meets any of
the criteria specified in clauses (a) to (h).
Explanation For the purposes of this clause, the expression connected
person means-
(i) any person who is promoter or in the management or control of the
resolution applicant; or
(ii) any person who shall be the promoter or in management or control
of the business of the corporate debtor during the implementation of
the resolution plan; or
(iii) the holding company, subsidiary company, associate company or
related party of a person referred to in Clauses (i) and (ii)
(j) Has been subject to any disability, corresponding to clauses (a) to
(i), under any law in a jurisdiction outside India.
(2021) ABC 35
22. The Insolvency and Bankruptcy Code (Amendment) Act, 2017, received
the assent of the President on 28.1.2018, but came into force with
retrospective effect from 23.11.2017. Section 29A, as contained therein, reads
as follows:
29A. Persons not eligible to be resolution applicant. - A person shall not
be eligible to submit a resolution plan, if such person, or any other
person acting jointly or in concert with such person
(b) is a wilful defaulter in accordance with the guidelines of the Reserve
1949);
(c) has an account, or an account of a corporate debtor under the
management or control of such person or of whom such person is a
promoter, classified as nonperforming asset in accordance with the
guidelines of the Reserve Bank of India issued under the Banking
Regulation Act, 1949 (10 of 1949) and at least a period of one year
has lapsed from the date of such classification till the date of
commencement of the corporate insolvency resolution process of
the corporate debtor:
Provided that the person shall be eligible to submit a resolution plan if
such person makes payment of all overdue amounts with interest thereon
and charges relating to non-performing asset accounts before submission
of resolution plan;
(d) has been convicted for any offence punishable with imprisonment
for two years or more;
(e) is disqualified to act as a director under the Companies Act, 2013
(18 of 2013);
(f) is prohibited by the Securities and Exchange Board of India from
trading in securities or accessing the securities markets;
(g) has been a promoter or in the management or control of a corporate
debtor in which a preferential transaction, undervalued transaction,
extortionate credit transaction or fraudulent transaction has taken
place and in respect of which an order has been made by the
Adjudicating Authority under this Code;
(h) has executed an enforceable guarantee in favour of a creditor in
respect of a corporate debtor against which an application for
insolvency resolution made by such creditor has been admitted
under this Code;
(i) has been subject to any disability, corresponding to Clauses (a) to
(h), under any law in a jurisdiction outside India; or
(j) has a connected person not eligible under Clauses (a) to (i).
Explanation. For the purposes of this Clause, the expression “connected
person” means
(i) any person who is the promoter or in the management or control of
the resolution applicant; or
related party of a person referred to in Clauses (i) and (ii):
Provided that nothing in Clause (iii) of this Explanation shall apply to
(A) a scheduled bank; or (B) an asset reconstruction company registered
with the Reserve Bank of India under Section 3 of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 (54 of 2002); or (C) an Alternate Investment Fund registered
with the Securities and Exchange Board of India.
23. Finally, the Insolvency and Bankruptcy Code (Second Amendment) Act,
2018, received the assent of the President on 17.8.2018, but came into force
with retrospective effect from 06.06.2018. The said amendment inter alia
amended Section 29A, which now reads as follows:
29A. Persons not eligible to be resolution applicant.A person shall not be
eligible to submit a resolution plan, if such person, or any other person acting
jointly or in concert with such person
(b) is a wilful defaulter in accordance with the guidelines of the Reserve
1949);
(c) at the time of submission of the resolution plan has an account, or
an account of a corporate debtor under the management or control
of such person or of whom such person is a promoter, classified as
nonperforming asset in accordance with the guidelines of the
Reserve Bank of India issued under the Banking Regulation Act,
1949 (10 of 1949) or the guidelines of a financial sector regulator
issued under any other law for the time being in force, and at least a
period of one year has lapsed from the date of such classification till
the date of commencement of the corporate insolvency resolution
process of the corporate debtor: Provided that the person shall be
eligible to submit a resolution plan if such person makes payment of
all overdue amounts with interest thereon and charges relating to
non-performing asset accounts before submission of resolution plan:
Provided further that nothing in this clause shall apply to a resolution
applicant where such applicant is a financial entity and is not a related party to
the corporate debtor.
(2021) ABC 37
Explanation I.For the purposes of this proviso, the expression related party
shall not include a financial entity, regulated by a financial sector regulator, if
it is a financial creditor of the corporate debtor and is a related party of the
corporate debtor solely on account of conversion or substitution of debt into
equity shares or instruments convertible into equity shares, prior to the
insolvency commencement date.
Explanation II.For the purposes of this clause, where a resolution applicant
has an account, or an account of a corporate debtor under the management or
control of such person or of whom such person is a promoter, classified as
non-performing asset and such account was acquired pursuant to a prior
resolution plan approved under this Code, then, the provisions of this clause
shall not apply to such resolution applicant for a period of three years from
the date of approval of such resolution plan by the Adjudicating Authority
under this Code;
(d) has been convicted for any offence punishable with imprisonment
(i) for two years or more under any Act specified under the Twelfth
Schedule; or
(ii) for seven years or more under any other law for the time being in
force:
Provided that this clause shall not apply to a person after the expiry of a
period of two years from the date of his release from imprisonment:
Provided further that this Clause shall not apply in relation to a connected
person referred to in Clause (iii) of Explanation I;
(e) is disqualified to act as a director under the Companies Act, 2013
(18 of 2013):
Provided that this clause shall not apply in relation to a connected person
referred to in Clause (iii) of Explanation I;
(f) is prohibited by the Securities and Exchange Board of India from
trading in securities or accessing the securities markets;
(g) has been a promoter or in the management or control of a corporate
debtor in which a preferential transaction, undervalued transaction,
place and in respect of which an order has been made by the
Adjudicating Authority under this Code: Provided that this clause
shall not apply if a preferential transaction,undervalued transaction,
place prior to the acquisition of the corporate debtor by the
resolution applicant pursuant to a resolution plan approved under
this Code or pursuant to a scheme or plan approved by a financial
sector regulator or a court, and such resolution applicant has not
otherwise contributed to the preferential transaction, undervalued
transaction, extortionate credit transaction or fraudulent transaction;
(h) has executed a guarantee in favour of a creditor in respect of a
corporate debtor against which an application for insolvency
resolution made by such creditor has been admitted under this Code
and such guarantee has been invoked by the creditor and remains
unpaid in full or part;
(i) is subject to any disability, corresponding to Clauses (a) to (h),
under any law in a jurisdiction outside India; or
(j) has a connected person not eligible under Clauses (a) to (i).
Explanation I.For the purposes of this clause, the expression connected person
means
(i) any person who is the promoter or in the management or control of
the resolution applicant; or
related party of a person referred to in Clauses (i) and (ii):
Provided that nothing in Clause (iii) of Explanation I shall apply to a
resolution applicant where such applicant is a financial entity and is not a
related party of the corporate debtor:
Provided further that the expression related party shall not include a financial
entity, regulated by a financial sector regulator, if it is a financial creditor of
the corporate debtor and is a related party of the corporate debtor solely on
account of conversion or substitution of debt into equity shares or instruments
convertible into equity shares, prior to the insolvency commencement date;
Explanation II.For the purposes of this section, financial entity shall mean the
following entities which meet such criteria or conditions as the Central
Government may, in consultation with the financial sector regulator, notify in
this behalf, namely
(a) A scheduled bank;
(b) Any entity regulated by a foreign central bank or a securities market
regulator or other financial sector regulator of a jurisdiction outside
India which jurisdiction is compliant with the Financial Action Task
Force Standards and is a signatory to the International Organisation
of Securities Commissions Multilateral Memorandum of
Understanding;
(c) Any investment vehicle, registered foreign institutional investor,
registered foreign portfolio investor or a foreign venture capital
investor, where the terms shall have the meaning assigned to them
in regulation 2 of the Foreign Exchange Management (Transfer or
Issue of Security by a Person Resident Outside India) Regulations,
(2021) ABC 39
2017 made under the Foreign Exchange Management Act, 1999 (42
of 1999);
(d) An asset reconstruction company registered with the Reserve Bank
of India under Section 3 of the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 (54
of 2002);
(e) An Alternate Investment Fund registered with the Securities and
Exchange Board of India;
(f) Such categories of persons as may be notified by the Central
Government.
24. The Honble Minister of Finance and Minister of Corporate Affairs, Shri
Arun Jaitley, while moving the Insolvency and Bankruptcy Code
(Amendment) Bill, 2017, stated on 29.12.2017:
The core and soul of this new Ordinance is really Clause 5, which is Section
29A of the original Bill. I may just explain that once a company goes into the
resolution process, then applications would be invited with regard to the
potential resolution proposals as far as the company is concerned or the
enterprise is concerned. Now a number of ineligibility clauses were not there
in the original Act and, therefore, Clause 29A introduces those who are not
eligible to apply. For instance there is a clause with regard to an undischarged
insolvent who is not eligible to apply; a person who has been disqualifies
under the Companies Act as a director cannot apply and a person who is
prohibited under the SEBI Act cannot apply. So these are
statutorydisqualifications. And there is also a disqualification in Clause (c)
with regard to those who are corporate debtors and who as on the date of the
application making a bid do not operationalise the account by paying the
interest itself i.e. you cannot say that I have an NPA. I am not making the
account operational. The accounts will continue to be NPAs and yet I am
going to apply for this. Effectively this clause will mean that those who are in
management and on account of whom this insolvent or non-performing asset
has arisen will now try and say. I do not discharge any of the outstanding
debts in terms of making the accounts operational and yet I would like to
apply and set the enterprise back at a discount value, for this is not the object
of this particular Act, So clause 5 has been brought in with that purpose in
mind. (Emphasis supplied)
25. The Statement of Objects and Reasons of the aforesaid Bill lays down:
2. The provisions for insolvency resolution and liquidation of a corporate
person in the Code did not restrict or bar any person from submitting a
resolution plan or participating in the acquisition process of the assets of
the company at the time of liquidation. Concerns have been raised that
persons who, with their misconduct contributed to defaults of companies
or are otherwise undesirable, may misuse this situation due to lack of
prohibition or restrictions to participate in the resolution or liquidation
process, and gain or regain control of the corporate debtor. This may
undermine the processes laid down in the Code as the unscrupulous
person would be seen to be rewarded at the expense of the creditors. In
addition, in order to check that the undesirable persons who may have
submitted their resolution plans in the absence of such a provision,
responsibility is also being entrusted on the committee of creditors to
give a reasonable period to repay overdue amounts and become eligible.
(Emphasis supplied)
26. It is in this background that the section has to be construed. In Ms. Eera
Through Dr. Manjula Krippendorf v. State (Govt. of NCT of Delhi) & Anr.,
(2017) 15 SCC 133, this Court, after referring to the golden rule of literal
construction, and its older counterpart the object rule in Heydons case,
referred to the theory of creative interpretation as follows:-
122. Instances of creative interpretation are when the Court looks at both
the literal language as well as the purpose or object of the statute in order
to better determine what the words used by the draftsman of legislation
mean. In DR Venkatachalam v. Transport Commr. [DR Venkatachalam
v. Transport Commr., (1977) 2 SCC 273], an early instance of this is
found in the concurring judgment of Beg, J. The learned Judge put it
rather well when he said: (SCC p. 287, para 28) 28. It is, however,
becoming increasingly fashionable to start with some theory of what is
basic to a provision or a chapter or in a statute or even to our
Constitution in order to interpret and determine the meaning of a
particular provision or rule made to subserve an assumed basic
requirement. I think that this novel method of construction puts, if I may
say so, the cart before the horse. It is apt to seriously mislead us unless
the tendency to use such a mode of construction is checked or corrected
by this Court. What is basic for a section or a chapter in a statute is
provided: firstly, by the words used in the statute itself; secondly, by the
context in which a provision occurs, or, in other words, by reading the
statute as a whole; thirdly, by the Preamble which could supply the key
to the meaning of the statute in cases of uncertainty or doubt; and,
fourthly, where some further aid to construction may still be needed to
resolve an uncertainty, by the legislative history which discloses the
wider context or perspective in which a provision was made to meet a
particular need or to satisfy a particular purpose. The last mentioned
method consists of an application of the mischief rule laid down in
Heydon case (Heydon case, (1584) 3 Co Rep 7a : 76 ER 637) long ago.
xxx xxx xxx
127. It is thus clear on a reading of English, US, Australian and our own
Supreme Court judgments that the Lakshman Rekha has in fact been
extended to move away from the strictly literal rule of interpretation back
to the rule of the old English case of Heydon [Heydon case, (1584) 3 Co
Rep 7a : 76 ER 637], where the Court must have recourse to the purpose,
(2021) ABC 41
object, text and context of a particular provision before arriving at a
judicial result. In fact, the wheel has turned full circle. It started out by
the rule as stated in 1584 in Heydon case [Heydon case, (1584) 3 Co Rep
7a : 76 ER 637], which was then waylaid by the literal interpretation rule
laid down by the Privy Council and the House of Lords in the mid-1800s,
and has come back to restate the rule somewhat in terms of what was
most felicitously put over 400 years ago in Heydon case [Heydon case,
(1584) 3 Co Rep 7a : 76 ER 637].
27. A purposive interpretation of Section 29A, depending both on the text
and the context in which the provision was enacted, must, therefore, inform
our interpretation of the same. We are concerned in the present matter with
sub-clauses (c), (f), (i) and (j) thereof.
28. It will be noticed that the opening lines of Section 29A contained in the
Ordinance of 2017 are different from the opening lines of Section 29A as
contained in the Amendment Act of 2017. What is important to note is that
the phrase persons acting in concert is conspicuous by its absence in the
Ordinance of 2017. The concepts of promoter, management and control which
were contained in the opening lines of Section 29A under the Ordinance have
now been transferred to sub-clause (c) in the Amendment Act of 2017. It is,
therefore, important to note that the Amendment Act of 2017 opens with
language which is of wider import than that contained in the Ordinance of
2017, evincing an intention to rope in all persons who may be acting in
concert with the person submitting a resolution plan.
29. The opening lines of Section 29A of the Amendment Act refer to a de
facto as opposed to a de jure position of the persons mentioned therein. This is
a typical instance of a see through provision, so that one is able to arrive at
persons who are actually in control, whether jointly, or in concert, with other
persons. A wooden, literal, interpretation would obviously not permit a
tearing of the corporate veil when it comes to the person whose eligibility is
to be gone into. However, a purposeful and contextual interpretation, such as
is the felt necessity of interpretation of such a provision as Section 29A, alone
governs. For example, it is well settled that a shareholder is a separate legal
entity from the company in which he holds shares. This may be true generally
speaking, but when it comes to a corporate vehicle that is set up for the
purpose of submission of a resolution plan, it is not only permissible but
imperative for the competent authority to find out as to who are the
constituent elements that make up such a company. In such cases, the
principle laid down in Salomon v. A Salomon and Co. Ltd. (1897) AC 22 will
not apply. For it is important to discover in such cases as to who are the real
individuals or entities who are acting jointly or in concert, and who have set
up such a corporate vehicle for the purpose of submission of a resolution plan.
30. The doctrine of piercing the corporate veil is as well settled as the
Salomon (supra.) principle itself. In Life Insurance Corporation of India v.
Escorts Ltd. & Ors., (1986) 1 SCC 264, this Court held:
90. It was submitted that the thirteen Caparo companies were thirteen
companies in name only; they were but one and that one was an
individual, Mr Swraj Paul. One had only to pierce the corporate veil to
discover Mr Swraj Paul lurking behind. It was submitted that thirteen
applications were made on behalf of thirteen companies in order to
circumvent the scheme which prescribed a ceiling of one per cent on
behalf of each non-resident of Indian nationality or origin, or each
company 60 per cent of whose shares were owned by non-residents of
Indian nationality/origin. Our attention was drawn to the picturesque
pronouncement of Lord Denning M.R. in Wallersteiner v. Moir, (1974) 3
All ER 217 and the decisions of this Court in Tata Engineering and
Locomotive Co. Ltd. v. State of Bihar, (1964) 6 SCR 885, CIT v. Sri
Meenakshi Mills Ltd.,(1967) 1 SCR 934 and Workmen v. Associated
Rubber Industry Ltd., (1985) 4 SCC 114. While it is firmly established
ever since Salomon v. A. Salomon & Co. Ltd.,1897 AC 22 was decided
that a company has an independent and legal personality distinct from
the individuals who are its members, it has since been held that the
corporate veil may be lifted, the corporate personality may be ignored
and the individual members recognised for who they are in certain
exceptional circumstances Pennington in his Company Law (4th Edn.)
states:
Four inroads have been made by the law on the principle of the separate
legal personality of companies. By far the most extensive of these has
been made by legislation imposing taxation. The government, naturally
enough, does not willingly suffer schemes for the avoidance of taxation
which depend for their success on the employment of the principle of
separate legal personality, and in fact legislation has gone so far that in
certain circumstances taxation can be heavier if companies are employed
by the taxpayer in an attempt to minimise his tax liability than if he uses
other means to give effect to his wishes. Taxation of companies is a
complex subject, and is outside the scope of this book. The reader who
wishes to pursue the subject is referred to the many standard text books
on corporation tax, income tax, capital gains tax and capital transfer tax.
The other inroads on the principle of separate corporate personality have been
made by two sections of the Companies Act, 1948, by judicial disregard of the
principle where the protection of public interest is of paramount importance,
or where the company has been formed to evade obligations imposed by the
law, and by the courts implying in certain cases that a company is an agent or
trustee for its members. In Palmer's Company Law (23rd Edn.), the present
position in England is stated and the occasions when the corporate veil may
be lifted have been enumerated and classified into fourteen categories.
Similarly in Gower's Company Law (4th Edn.), a chapter is devoted to lifting
the veil and the various occasions when that may be done are discussed. In
Tata Engineering and Locomotive Co. Ltd., (1964) 6 SCR 885 the company
wanted the corporate veil to be lifted so as to sustain the maintainability of the
(2021) ABC 43
petition, filed by the company under Article 32 of the Constitution, by treating
it as one filed by the shareholders of the company. The request of the
company was turned down on the ground that it was not possible to treat the
company as a citizen for the purposes of Article 19. In CIT v. Sri Meenakshi
Mills Ltd., (1967) 1 SCR 934 the corporate veil was lifted and evasion of
income tax prevented by paying regard to the economic realities behind the
legal facade. In Workmen v. Associated Rubber Industry Ltd., (1985) 4 SCC
114 resort was had to the principle of lifting the veil to prevent devices to
avoid welfare legislation. It was emphasised that regard must be had to
substance and not the form of a transaction. Generally and broadly speaking,
we may say that the corporate veil may be lifted where a statute itself
contemplates lifting the veil, or fraud or improper conduct is intended to be
prevented, or a taxing statute or a beneficent statute is sought to be evaded or
where associated companies are inextricably connected as to be, in reality,
part of one concern. It is neither necessary nor desirable to enumerate the
classes of cases where lifting the veil is permissible, since that must
necessarily depend on the relevant statutory or other provisions, the object
sought to be achieved, the impugned conduct, the involvement of the element
of the public interest, the effect on parties who may be affected etc. (Emphasis
supplied.)
31. This statement of the law was followed in Union of India v. ABN Amro
Bank and others, (2013) 16 SCC 490, at paragraphs 43 and 44 as follows:
43. We are of the view that in a given situation the authorities
functioning under FERA find that there are attempts to overreach the
provision of Section 29(1)
(a), the authority can always lift the veil and examine whether the parties
have entered into any fraudulent, sham, circuitous device so as to
overcome statutory provisions like Section 29(1)(a). It is trite law that
any approval/permission obtained by non-disclosure of all necessary
information or making a false representation tantamount to
approval/permission obtained by practising fraud and hence a nullity.
Reference may be made to the judgment of this Court in Union of India
v. Ramesh Gandhi, (2012) 1 SCC 476.
44. Even in Escorts case, (1986) 1 SCC 264, this Court has taken the
view that it is neither necessary nor desirable to enumerate the classes of
cases where lifting the veil is permissible, since that must necessarily
depend on the relevant statutory or other provisions, the object sought to
be achieved, the impugned conduct, the involvement of the element of
the public interest, the effect on parties who may be affected, etc. In
Escorts case [(1986) 1 SCC 264], this Court held as follows: (SCC pp.
335-36, para 90)
90. Generally and broadly speaking, we may say that the corporate veil
may be lifted where a statute itself contemplates lifting the veil, or fraud
or improper conduct is intended to be prevented, or a taxing statute or a
beneficent statute is sought to be evaded or where associated companies
are inextricably connected as to be, in reality, part of one concern.
32. Similarly in Balwant Rai Saluja & Anr. etc. etc. v. Air India Ltd. & Ors.,
(2014) 9 SCC 407, this Court in following Escorts Ltd. (supra.), held:
70. The doctrine of piercing the corporate veil stands as an exception to
the principle that a company is a legal entity separate and distinct from
its shareholders with its own legal rights and obligations. It seeks to
disregard the separate personality of the company and attribute the acts
of the company to those who are allegedly in direct control of its
operation. The starting point of this doctrine was discussed in the
celebrated case of Salomon v. Salomon & Co. Ltd., (1897) AC 22 Lord
Halsbury LC, negating the applicability of this doctrine to the facts of the
case, stated that: (AC pp. 30 & 31) [a company] must be treated like any
other independent person with its rights and liabilities [legally]
appropriate to itself whatever may have been the ideas or schemes of
those who brought it into existence. Most of the cases subsequent to
Salomon case [1897 AC 22], attributed the doctrine of piercing the veil
to the fact that the company was a sham or a façade. However, there was
yet to be any clarity on applicability of the said doctrine.
71. In recent times, the law has been crystallised around the six
principles formulated by Munby, J. in Ben Hashem v. Ali Shayif [Ben
Hashem v. Ali Shayif, 2008 EWHC 2380 (Fam)]. The six principles, as
found at paras 159-64 of the case are as follows:
(i) Ownership and control of a company were not enough to
justify piercing the corporate veil;
(ii) The court cannot pierce the corporate veil, even in the absence
of third-party interests in the company, merely because it is
thought to be necessary in the interests of justice;
(iii) The corporate veil can be pierced only if there is some
impropriety;
(iv) The impropriety in question must be linked to the use of the
company structure to avoid or conceal liability;
(v) To justify piercing the corporate veil, there must be both
control of the company by the wrongdoer(s) and impropriety,
that is use or misuse of the company by them as a device or
facade to conceal their wrongdoing; and
(vi) The company may be a façade even though it was not
originally incorporated with any deceptive intent, provided that
it is being used for the purpose of deception at the time of the
relevant transactions. The court would, however, pierce the
corporate veil only so far as it was necessary in order to
provide a remedy for the particular wrong which those
controlling the company had done
(2021) ABC 45
72. The principles laid down by Ben Hashem case [Ben Hashem v. Ali
Shayif, 2008 EWHC 2380 (Fam)] have been reiterated by the UK
Supreme Court by Lord Neuberger in Prest v. Petrodel Resources Ltd. ,
(2013) 2 AC 415, UKSC at para 64. Lord Sumption, in Prest case
[(2013) 2 AC 415], finally observed as follows: (AC p. 488, para 35) 35.
I conclude that there is a limited principle of English law which applies
when a person is under an existing legal obligation or liability or subject
to an existing legal restriction which he deliberately evades or whose
enforcement he deliberately frustrates by interposing a company under
his control. The court may then pierce the corporate veil for the purpose,
and only for the purpose, of depriving the company or its controller of
the advantage that they would otherwise have obtained by the company's
separate legal personality. The principle is properly described as a
limited one, because in almost every case where the test is satisfied, the
facts will in practice disclose a legal relationship between the company
and its controller which will make it unnecessary to pierce the corporate
veil.
73. The position of law regarding this principle in India has been
enumerated in various decisions. A Constitution Bench of this Court in
LIC v. Escorts Ltd.,(1986) 1 SCC 264, while discussing the doctrine of
corporate veil, held that: (SCC pp. 335-36, para 90) 90. Generally and
broadly speaking, we may say that the corporate veil may be lifted where
a statute itself contemplates lifting the veil, or fraud or improper conduct
is intended to be prevented, or a taxing statute or a beneficent statute is
sought to be evaded or where associated companies are inextricably
connected as to be, in reality, part of one concern. It is neither necessary
nor desirable to enumerate the classes of cases where lifting the veil is
permissible, since that must necessarily depend on the relevant statutory
or other provisions, the object sought to be achieved, the impugned
conduct, the involvement of the element of the public interest, the effect
on parties who may be affected, etc.
33. Similarly in Delhi Development Authority v. Skipper Construction
Company (P) Ltd. & Another, (1996) 4 SCC 622, this Court held:
24. In Salomon v. Salomon & Co. Ltd. [1897 AC 22] the House of Lords
had observed, the company is at law a different person altogether from
the subscribers; and, though it may be that after incorporation the
business is precisely the same as it was before, the same persons are
managers, and the same hands receive the profits, the company is not in
law the agent of the subscribers or trustee for them. Nor are the
subscribers as members liable, in any shape or form, except to the extent
and in the manner provided by that Act. Since then, however, the courts
have come to recognize several exceptions to the said rule. While it is not
necessary to refer to all of them, the one relevant to us is when the
corporate personality is being blatantly used as a cloak for fraud or
improper conduct. [Gower: Modern Company Law 4th Edn. (1979) at p.
137.] Pennington (Company Law 5th Edn. 1985 at p. 53) also states that
where the protection of public interests is of paramount importance or
where the company has been formed to evade obligations imposed by the
law, the court will disregard the corporate veil. A Professor of Law, S.
Ottolenghi in his article From peeping behind the Corporate Veil, to
ignoring it completely says the concept of piercing the veil in the United
States is much more developed than in the UK. The motto, which was
laid down by Sanborn, J. and cited since then as the law, is that when the
notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud, or defend crime, the law will regard the corporation as an
association of persons. The same can be seen in various European
jurisdictions.,(1990) 53 Modern Law Review 338 Indeed, as far back as
1912, another American Professor L. Maurice Wormser examined the
American decisions on the subject in a brilliantly written article Piercing
the veil of corporate entity [published in (1912) XII Columbia Law
Review 496] and summarised their central holding in the following
words:
The various classes of cases where the concept of corporate entity should
be ignored and the veil drawn aside have now been briefly reviewed.
What general rule, if any, can be laid down? The nearest approximation
to generalisation which the present state of the authorities would warrant
is this: When the conception of corporate entity is employed to defraud
creditors, to evade an existing obligation, to circumvent a statute, to
achieve or perpetuate monopoly, or to protect knavery or crime, the
courts will draw aside the web of entity, will regard the corporate
company as an association of live, up-and-doing, men and women
shareholders, and will do justice between real persons.
25. In Palmer's Company Law, this topic is discussed in Part II of Vol. I.
Several situations where the court will disregard the corporate veil are set
out. It would be sufficient for our purposes to quote the eighth exception.
It runs:
The courts have further shown themselves willing to lifting the veil
where the device of incorporation is used for some illegal or improper
purpose. Where a vendor of land sought to avoid the action for specific
performance by transferring the land in breach of contract to a company
he had formed for the purpose, the court treated the company as a mere
sham and made an order for specific performance against both the
vendor and the company. Similar views have been expressed by all the
commentators on the Company Law which we do not think necessary to
refer to.
26. The law as stated by Palmer and Gower has been approved by this
Court in TELCO v. State of Bihar,(1964) 6 SCR 885. The following
passage from the decision is apposite:
(2021) ABC 47
Gower has classified seven categories of cases where the veil of a
corporate body has been lifted. But, it would not be possible to evolve a
rational, consistent and inflexible principle which can be invoked in
determining the question as to whether the veil of the corporation should
be lifted or not. Broadly stated, where fraud is intended to be prevented,
or trading with an enemy is sought to be defeated, the veil of a
corporation is lifted by judicial decisions and the shareholders are held to
be the persons who actually work for the corporation.
27. In DHN Food Distributors Ltd. v. London Borough of Tower
Hamlets, (1976) 3 All ER 462 the court of appeal dealt with a group of
companies. Lord Denning quoted with approval the statement in Gower's
Company Law that there is evidence of a general tendency to ignore the
separate legal entities of various companies within a group, and to look
instead at the economic entity of the whole group.
The Learned Master of Rolls observed that this group is virtually the
same as a partnership in which all the three companies are partners. He
called it a case of three in one and, alternatively, as one in three.
28. The concept of corporate entity was evolved to encourage and
promote trade and commerce but not to commit illegalities or to defraud
people. Where, therefore, the corporate character is employed for the
purpose of committing illegality or for defrauding others, the court
would ignore the corporate character and will look at the reality behind
the corporate veil so as to enable it to pass appropriate orders to do
justice between the parties concerned. The fact that Tejwant Singh and
members of his family have created several corporate bodies does not
prevent this Court from treating all of them as one entity belonging to
and controlled by Tejwant Singh and family if it is found that these
corporate bodies are merely cloaks behind which lurks Tejwant Singh
and/or members of his family and that the device of incorporation was
really a ploy adopted for committing illegalities and/or to defraud people.
(Emphasis supplied)
34. It is thus clear that, where a statute itself lifts the corporate veil, or where
protection of public interest is of paramount importance, or where a company
has been formed to evade obligations imposed by the law, the court will
disregard the corporate veil. Further, this principle is applied even to group
companies, so that one is able to look at the economic entity of the group as a
whole.
35. The expression acting jointly in the opening sentence of Section 29A
cannot be confused with joint venture agreements, as was sought to be argued
by Shri Rohatgi. He cited various judgments including Faqir Chand Gulati v.
Uppal Agencies Pvt. Ltd. & Anr., (2016) 1 ITJ Online 732 (SC) : (2013) 8
STD 693 : (2008) 10 SCC 345, and Laurel Energetics Private Limited v.
Securities and Exchange Board of India, (2017) 8 SCC 541, to buttress his
submission that a joint venture is a contractually agreed sharing of control
over an economic activity. We are afraid that these judgments are wholly
inapplicable. All that is to be seen by the expression acting jointly is whether
certain persons have got together and are acting jointly in the sense of acting
together. If this is made out on the facts, no super added element of joint
venture as is understood in law is to be seen. The other important phrase is in
concert. By Section 3(37) of the Code, words and expressions used but not
defined in the Code but defined inter alia by the SEBI Act, 1992, and the
Companies Act, 2013, shall have the meanings respectively assigned to them
in those Acts. In exercise of powers conferred by Sections 11 and 30 of the
SEBI Act, 1992, the 2011 Takeover Regulations have been promulgated by
SEBI.
36. Originally, the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 1994, defined persons acting in concert as follows:
(d) Person acting in concert comprises persons who, pursuant to an
agreement or understanding acquires or agrees to acquire shares in a
company for a common objective o purpose of substantial
acquisition of shares and includes:
(i) A company, its holding company, or subsidiaries of such companies
or companies under the same management either individually or all
with each other.
(ii) A company with any of its directors, or any person entrusted with
the management of the funds of the company;
(iii) Directors of companies, referred to in clause (i) and his associates;
and iv. Mutual fund, financial institution, merchant banker, portfolio
manager and any investment company in which any person has an
interest as director, fund manager, trustee, or as a shareholder
having not less than 2% of the paid-up capital of that company.
Explanation For the purposes of this clause associate means:-
(A) Any relative of that person within the meaning of section 6 of the
Companies Act, 1956 (1 of 1956);
(B) the director or his relative whether individually or in aggregate
holding more than 2% of the paid-up equity capital of such
company. This was replaced in 1997 by the Regulations of 1997,
and then further by the 2011 Takeover Regulations.
37. The Justice P.N. Bhagwati Committee Report on Takeovers, 1997,
pursuant to which the Regulations of 1997 were framed, stated as follows:
2.22 Definition of Persons acting in concert Persons acting in concert
have particular relevance to public offers, for often an acquirer can
acquire shares or voting rights in a company in concert with any other
person in a manner that the acquisitions made by him remain below the
threshold limit, though taken together with the voting rights of persons in
concert, the threshold may well be exceeded. It is therefore, important to
define persons acting in concert.
(2021) ABC 49
To be acting in concert with an acquirer, persons must fulfil certain
bright line tests. They must have commonality of objectives and a
community of interests which could be acquisition of shares or voting
rights beyond the threshold limit, or gaining control over the company
and their act of acquiring the shares or voting rights in a company must
serve this common objective. Implicit in the concerted action of these
persons must be an element of cooperation. And as has been observed,
this cooperation could be extended in several ways, directly or indirectly,
or through an agreement formal or informal. The committee was of the
view that the present definition of persons acting in concert in sub-clause
(d) of regulation 2 needed to be strengthened by incorporating all the
ingredients discussed in the foregoing paragraph to bring out clearly the
import of acting in concert.
Any person fulfilling the bright line tests would be acting in concert. But
there could also be certain persons who, by their position in relation to an
acquirer or by the very nature of their business, could be generally
presumed to be acting in concert, unless proved to the contrary. In other
words, a rebuttable presumption of being persons in concert with burden
of proof cast on them will be raised against these persons. The
Committee was of the view that while the net of presumption should be
cast to include all such persons, it should not be cast too widely so as to
impinge on the freedom of any person to carry on his normal business
activities. In other words, there should be well defined bounds of
presumption.
xxx xxx xxx 2.23 Burden of proof on persons acting in concert The
Committee further noted that in the existing Regulations, there is no
burden of proof on the persons acting in concert. Once the burden of
proof is cast on the persons presumed to be acting in concert, it would be
important to ensure that the persons are grouped in categories such that
the persons may be presumed to be acting in concert only with another
person belonging to the same category. A general reading of the existing
provisions implies that a person belonging to any one of the categories
mentioned in sub-clauses (i) to (iv) of Clause (d) of regulation 2 could be
presumed to be acting in concert with a person belonging to any other
category. Thus, a company could be presumed to be acting in concert
with a merchant banker, mutual fund, or any other body even though
they may all be distinctly independent entities without any connection
whatsoever. Such irrebuttable presumption of a common motive amongst
unrelated parties would be illogical and not legally tenable. A distinction
must be made between persons who could be presumed to be acting in
concert unless proved to the contrary and others who may be acting in
concert even though such a presumption cannot be raised against them.
In this context, it may be noted that the UK City Code of Takeovers and
Mergers, for this very reason, has divided the persons acting in concert
into groups in such a manner that these persons would in the natural
course of affairs be presumed to be acting in concert only with another
person in the same group. This served to set the pattern for raising
rebuttable presumptions. The Committee recommends that .In the
definition of persons acting in concert, the persons be grouped in such a
manner in the same group or category that they bear such relationship
amongst themselves as could justify raising of a presumption in the
normal course of affairs that they are acting in concert. For example, a
sponsor of a mutual fund could be presumed to be acting in concert with
the trustee company or asset management company of the same mutual
fund; similarly a merchant banker may be presumed to be acting in
concert with his client as acquirer. But no presumption may be made that
persons in one group are acting in concert with persons in another group.
It has to be proved by evidence that they are acting in concert.
(Reference: Part II of the Report sub-clause (e) of sub-regulation (1) of
regulation 2) .
The definition of the persons acting in concert as defined above would
imply a rebuttable presumption. The question which arises is who would
rule whether the presumption has been rebutted. The responsibility of
ruling will lie with SEBI and over a period of time, jurisprudence on the
subject will develop.
38. By Regulation 2(1)(q) of the 2011 Takeover Regulations, persons acting
in concert is defined as follows:-
(q) persons acting in concert means, (1) persons who, with a common
objective or purpose of acquisition of shares or voting rights in, or
exercising control over a target company, pursuant to an agreement or
understanding, formal or informal, directly or indirectly co-operate for
acquisition of shares or voting rights in, or exercise of control over the
target company.
(2) Without prejudice to the generality of the foregoing, the persons
falling within the following categories shall be deemed to be persons
acting in concert with other persons within the same category, unless the
contrary is established,
(i) a company, its holding company, subsidiary company and any
company under the same management or control;
(ii) a company, its directors, and any person entrusted with the
management of the company;
(iii) directors of companies referred to in item (i) and (ii) of this sub-
clause and associates of such directors;
(iv) promoters and members of the promoter group;
(v) immediate relatives;
(vi) a mutual fund, its sponsor, trustees, trustee company, and asset
management company;
(2021) ABC 51
(vii) a collective investment scheme and its collective investment
management company, trustees and trustee company;
(viii) a venture capital fund and its sponsor, trustees, trustee company
and asset management company;
(viiia) an alternative investment fund and its sponsor, trustees, trustee
company and manager;
(ix) [***]
(x) a merchant banker and its client, who is an acquirer;
(xi) a portfolio manager and its client, who is an acquirer;
(xii) banks, financial advisors and stock brokers of the acquirer, or of any
company which is a holding company or subsidiary of the acquirer, and
where the acquirer is an individual, of the immediate relative of such
individual: Provided that this sub-clause shall not apply to a bank whose
sole role is that of providing normal commercial banking services or
activities in relation to an open offer under these regulations;
(xiii) an investment company or fund and any person who has an interest
in such investment company or fund as a shareholder or unitholder
having not less than 10 per cent of the paid-up capital of the investment
company or unit capital of the fund, and any other investment company
or fund in which such person or his associate holds not less than 10 per
cent of the paid-up capital of that investment company or unit capital of
that fund:
Provided that nothing contained in this sub- clause shall apply to holding
of units of mutual funds registered with the Board;
Explanation.For the purposes of this clause associate of a person means,
(a) any immediate relative of such person;
(b) trusts of which such person or his immediate relative is a trustee;
(c) partnership firm in which such person or his immediate relative is a
partner; and
(d) members of Hindu undivided families of which such person is a
coparcener;
39. It will be seen from the wide language used, that any understanding, even
if it is informal, and even if it is to indirectly cooperate to exercise control
over a target company, is included. Under sub-clause (2) of clause (q), a
deeming fiction is enacted, by which a presumption is raised in the categories
mentioned, that a person falling within one category is deemed to be acting in
concert with another person mentioned in the same category, unless the
contrary is established. The corporate veil is not merely torn but is left in
tatters by sub-clauses (i) to (iv) of Regulation 2(1) (q)(2). What is also
important to note is that immediate relatives are also covered by sub-clause
(v) i.e., father and son, brothers, etc. Also of importance is the definition of
associate in the explanation to Regulation 2(1)(q)(2), which subsumes not
merely immediate relatives but other forms in which a person can be
associated with another - which includes the form of trust, partnership firm
and HUF. What is of great importance is that wherever persons act jointly or
in concert with the person who submits a resolution plan, all such persons are
covered by Section 29A. It is interesting to note that the report of the
Insolvency Law Committee of March, 2018, wanted to curtail the wide
definition of persons acting jointly or in concert as follows:
14.3 The term 'person acting jointly or in concert' has not been defined in
the Code and using the definition provided in the SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 2011 results in
inclusion of an extremely wide gamut of person within the scope of
section 29A. In practice, it is unclear whether the term connected person'
in clause (j) applies to only the resolution applicant or even 'persons
acting jointly or in concert with such person'. If the latter interpretation is
taken, this provision would be applicable to multiple layers of persons
who are related to the resolution applicant even remotely. Further, ARCs,
banks and alternate investment funds which are specifically excluded
from the definition of 'connected person' provided in Section 29A may be
caught by the term 'person acting jointly or in concert with such person'.
The Committee felt that Section 29A was introduced to disqualify only
those who had contributed in the downfall of the corporate debtor or
were unsuitable to run the company because of their antecedents whether
directly or indirectly. Therefore, extending the disqualification to a
resolution application owing to infirmities in persons remotely related
may have adverse consequences. Such interpretation of this provision
may shrink the pool of resolution applicants. Accordingly, the
Committee felt that the words,if such person, or any other person acting
jointly or in concert with such person" in the first line of Section 29A
must be deleted. This would clarify that Section 29A is applicable to the
resolution applicant and its connected person only.
Further, in order to ensure that anyone who acts with a common objective
along with the resolution applicant to acquire shares, voting rights or control
of the corporate debtor is required to pass the test laid down in Section 29A,
the Committee felt that the following clause must be added as Clause (iv) to
the definition of connected person in the explanation to Clause (j), "(iv) any
persons who along with the resolution applicant, with a common objective or
purpose of acquisition of shares or voting rights in, or exercising control over
a corporate debtor, pursuant to an agreement or understanding, formal or
informal, directly or indirectly co-operate for acquisition of shares or voting
rights in, or exercise of control over the corporate debtor." This part of the
report has not been accepted by the legislature, as none of the suggested
changes in the law have been made.
(2021) ABC 53
40. In Technip SA v. SMS Holding (Pvt.) Ltd. & Ors., (2005) 5 SCC 465, this
Court after referring to the Bhagwati Committee Report of 1997, stated as
follows:-
54. The standard of proof required to establish such concert is one of
probability and may be established if having regard to their relation etc.,
their conduct, and their common interest, that it may be inferred that they
must be acting together: evidence of actual concerted acting is normally
difficult to obtain, and is not insisted upon [CIT v. East Coast
Commercial Co. Ltd., (1967) 1 SCR 821]. (SCR p. 829 H)
55. While deciding whether a company was one in which the public were
substantially interested within the meaning of Section 23-A of the
Income Tax Act, 1922 this Court said:
The test is not whether they have actually acted in concert but whether
the circumstances are such that human experience tells us that it can
safely be taken that they must be acting together. It is not necessary to
state the kind of evidence that will prove such concerted actings. Each
case must necessarily be decided on its own facts. [CIT v. Jubilee Mills
Ltd., (1963) 48 ITR 9 (SC), p. 20]
56. In Guinness PLC and Distillers Co. PLC [Guinness PLC and
Distillers Company PLC (Panel hearing on 25.08.1987 and 02.09.1987 at
p. 10052 Reasons for decisions of the Panel.)] the question before the
Takeover Panel was whether Guinness had acted in concert with Pipetec
when Pipetec purchased shares in Distillers Company PLC. Various
factors were taken into consideration to conclude that Guinness had acted
in concert with Pipetec to get control over Distillers Company. The Panel
said:
The nature of acting in concert requires that the definition be drawn in
deliberately wide terms. It covers an understanding as well as an
agreement, and an informal as well as a formal arrangement, which leads
to cooperation to purchase shares to acquire control of a company. This
is necessary, as such arrangements are often informal, and the
understanding may arise from a hint. The understanding may be tacit,
and the definition covers situations where the parties act on the basis of a
nod or a wink. Unless persons declare this agreement or understanding,
there is rarely direct evidence of action in concert, and the Panel must
draw on its experience and common sense to determine whether those
involved in any dealings have some form of understanding and are acting
in cooperation with each other. [Guinness PLC and Distillers Company
PLC (Panel hearing on 25.08.1987 and 02.09.1987 at p. 10052 Reasons
for decisions of the Panel.)] (Emphasis supplied)
41. In M/s. Daiichi Sankyo Company Ltd. v. Jayaram Chigurupati & Ors.,
(2010) 7 SCC 449, this Court referred to the concept of persons acting in
concert and held that there must be a shared common objective for substantial
acquisition of shares of a target company under the SEBI regulations. A
fortuitous relationship coming into existence by accident or chance obviously
cannot amount to persons acting in concert. This Court held:-
49. The other limb of the concept requires two or more persons joining
together with the shared common objective and purpose of substantial
acquisition of shares, etc. of a certain target company. There can be no
persons acting in concert unless there is a shared common objective or
purpose between two or more persons of substantial acquisition of
shares, etc. of the target company. For, dehors the element of the shared
common objective or purpose the idea of person acting in concert is as
meaningless as a criminal conspiracy without any agreement to commit a
criminal offence. The idea of persons acting in concert is not about a
fortuitous relationship coming into existence by accident or chance. The
relationship can come into being only by design, by meeting of minds
between two or more persons leading to the shared common objective or
purpose of acquisition or substantial acquisition of shares, etc. of the
target company. It is another matter that the common objective or
purpose may be in pursuance of an agreement or an understanding,
formal or informal; the acquisition of shares, etc. may be direct or
indirect or the persons acting in concert may cooperate in actual
acquisition of shares, etc. or they may agree to cooperate in such
acquisition. Nonetheless, the element of the shared common objective or
purpose is the sine qua non for the relationship of persons acting in
concert to come into being. (Emphasis supplied) When coming to the
presumption created by the provision, this Court held that the deeming
provision is left open to rebuttal as indicated by the words unless the
contrary is established (see paragraph 54 of Daiichi (supra.)). Finally,
this Court held that whether a person is or is not acting in concert would
depend upon the facts of each case. (see paragraph 57 of Daiichi
(supra.)).
42. When we come to sub-clause (c) of Section 29A, the first thing that was
argued, at which the parties were at loggerheads, was the time at which sub-
clause (c) can be said to operate.
According to Shri Rohatgi, in the original sub-clause (c), pre- amendment, the
time must necessarily be the date of commencement of the corporate
insolvency resolution process, as is mentioned by the Section itself.
According to Messrs Salve and Singhvi, it is clear that since submission of a
resolution plan is spoken of, it is the time of submission of such plan and not
any anterior stage.
43. According to us, it is clear that the opening words of Section 29A furnish
a clue as to the time at which sub-clause (c) is to operate. The opening words
of Section 29A state: a person shall not be eligible to submit a resolution plan.
It is clear therefore that the stage of ineligibility attaches when the resolution
plan is submitted by a resolution applicant. The contrary view expressed by
Shri Rohatgi is obviously incorrect, as the date of commencement of the
(2021) ABC 55
corporate insolvency resolution process is only relevant for the purpose of
calculating whether one year has lapsed from the date of classification of a
person as a non- performing asset. Further, the expression used is has, which
as Dr. Singhvi has correctly argued, is in praesenti. This is to be contrasted
with the expression has been, which is used in sub- clauses (d) and (g), which
refers to an anterior point of time. Consequently, the amendment of 2018
introducing the words at the time of submission of the resolution plan is
clarificatory, as this was always the correct interpretation as to the point of
time at which the disqualification in sub-clause (c) of Section 29A will attach.
In fact, the amendment was made pursuant to the Insolvency Law Committee
Report of March, 2018. That report clearly stated:
In relation to applicability of Section 29A(c), the Committee also
discussed that it must be clarified that the disqualification pursuant to
Section 29A(c) shall be applicable if such NPA accounts are held by the
resolution applicant or its connected persons at the time of submission of
the resolution plan to the RP.
44. The ingredients of sub-clause (c) are that, the ineligibility to submit a
resolution plan attaches if any person, as is referred to in the opening lines of
Section 29A, either itself has an account, or is a promoter of, or in the
management or control of, a corporate debtor which has an account, which
account has been classified as a non-performing asset, for a period of at least
one year from the date of such classification till the date of commencement of
the corporate insolvency resolution process. For the purpose of applying this
sub-section, any one of three things, which are disjunctive, needs to be
established. The corporate debtor may be under the management of the person
referred to in Section 29A, the corporate debtor may be a person under the
control of such person, or the corporate debtor may be a person of whom such
person is a promoter.
45. The expression management would refer to the de jure management of a
corporate debtor. The de jure management of a corporate debtor would
ordinarily vest in a Board of Directors, and would include, in accord with the
definitions of manager, managing director and officer in Sections 2(53), 2(54)
and 2(59) respectively of the Companies Act, 2013, the persons mentioned
therein.
46. The expression control is defined in Section 2(27) of the Companies Act,
2013 as follows:-
(27) control shall include the right to appoint majority of the directors or
to control the management or policy decisions exercisable by a person or
persons acting individually or in concert, directly or indirectly, including
by virtue of their shareholding or management rights or shareholders
agreements or voting agreements or in any other manner;
47. The expression control is therefore defined in two parts. The first part
refers to de jure control, which includes the right to appoint a majority of the
directors of a company. The second part refers to de facto control. So long as
a person or persons acting in concert, directly or indirectly, can positively
influence, in any manner, management or policy decisions, they could be said
to be in control. A management decision is a decision to be taken as to how
the corporate body is to be run in its day to day affairs. A policy decision
would be a decision that would be beyond running day to day affairs, i.e.,
long term decisions. So long as management or policy decisions can be, or are
in fact, taken by virtue of shareholding, management rights, shareholders
agreements, voting agreements or otherwise, control can be said to exist.
48. Thus, the expression control, in Section 29A(c), denotes only positive
control, which means that the mere power to block special resolutions of a
company cannot amount to control. Control here, as contrasted with
management, means de facto control of actual management or policy
decisions that can be or are in fact taken. A judgment of the Securities
Appellate Tribunal in M/s Subhkam Ventures (I) Private Limited v. The
Securities and Exchange Board of India (Appeal No. 8 of 2009 decided on
15.01.2010), made the following observations qua control under the SEBI
(Substantial Acquisition of Shares and Takeover) Regulations, 1997, wherein
control is defined in Regulation 2(1) (e) in similar terms as in Section 2(27) of
the Companies Act, 2013. The Securities Appellate Tribunal held:
6. The term control has been defined in Regulation 2(1)(c) of the
takeover code to "include the right to appoint majority of the directors or
to control the management or policy decisions exercisable by a person or
persons acting individually or in concert, directly or indirectly, including
by virtue of their shareholding or management rights or shareholders
agreements or voting agreements or in any other manner." This definition
is an inclusive one and not exhaustive and it has two distinct and separate
features: i) the right to appoint majority of directors or, ii) the ability to
control the management or policy decisions by various means referred to
in the definition. This control of management or policy decisions could
be by virtue of shareholding or management rights or shareholders
agreement or voting agreements or in any other manner. This definition
appears to be similar to the one as given in Black's Law Dictionary
(Eighth Edition) at page 353 where this term has been defined as under:
Control - The direct or indirect power to direct the management and
policies of a person or entity, whether through ownership of voting
securities, by contract, or otherwise; the power or authority to manage,
direct, or oversee. Control, according to the definition, is a proactive and
not a reactive power. It is a power by which an acquirer can command
the target company to do what he wants it to do. Control really means
creating or controlling a situation by taking the initiative. Power by
which an acquirer can only prevent a company from doing what the latter
wants to do is by itself not control. In that event, the acquirer is only
reacting rather than taking the initiative. It is a positive power and not a
negative power. In a board managed company, it is the board of directors
(2021) ABC 57
that is in control. If an acquirer were to have power to appoint majority
of directors, it is obvious that he would be in control of the company but
that is not the only way to be in control. If an acquirer were to control the
management or policy decisions of a company, he would be in control.
This could happen by virtue of his shareholding or management rights or
by reason of shareholders agreements or voting agreements or in any
other manner. The test really is whether the acquirer is in the driving
seat. To extend the metaphor further, the question would be whether he
controls the steering, accelerator, the gears and the brakes. If the answer
to these questions is in the affirmative, then alone would he be in control
of the company. In other words, the question to be asked in each case
would be whether the acquirer is the driving force behind the company
and whether he is the one providing motion to the organization. If yes, he
is in control but not otherwise. In short control means effective control.
49. We think that these observations are apposite, and apply to the
expression control in Section 29A(c).
50. Section 29A(c) speaks of a corporate debtor under the management or
control of such person. The expression under would seem to suggest positive
or proactive control, as opposed to mere negative or reactive control. This
becomes even clearer when sub-clause (g) of Section 29A is read, wherein the
expression used is in the management or control of a corporate debtor. Under
sub-clause (g), only a person who is in proactive or positive control of a
corporate debtor can take the proactive decisions mentioned in sub-clause (g),
such as, entering into preferential, undervalued, extortionate credit, or
fraudulent transactions. It is thus clear that in the expression management or
control, the two words take colour from each other, in which case the
principle of noscitur a sociis must also be held to apply. Thus viewed, what is
referred to in sub-clauses (c) and (g) is de jure or de facto proactive or
positive control, and not mere negative control which may flow from an
expansive reading of the definition of the word control contained in Section
2(27) of the Companies Act, 2013, which is inclusive and not exhaustive in
nature.
51. In a recent judgment delivered by one of us (Nariman, J.) in Chintalapati
Srinivasa Raju v. Securities and Exchange Board of India, (2018) 7 SCC 443,
this Court after referring to the definition of control in the SEBI regulations,
held on facts that an executive director, on a fixed monthly salary, post
resignation, cannot be held to be a person exercising control within the
meaning of the SEBI regulations. This Court referred to with approval the
following test laid down in Securities and Exchange Board of India v. Kishore
R. Ajmera, (2016) 6 SCC 368:-
26. It is a fundamental principle of law that proof of an allegation
levelled against a person may be in the form of direct substantive
evidence or, as in many cases, such proof may have to be inferred by a
logical process of reasoning from the totality of the attending facts and
circumstances surrounding the allegations/charges made and levelled.
While direct evidence is a more certain basis to come to a conclusion,
yet, in the absence thereof the Courts cannot be helpless. It is the judicial
duty to take note of the immediate and proximate facts and
circumstances surrounding the events on which the charges/allegations
are founded and to reach what would appear to the Court to be a
reasonable conclusion therefrom. The test would always be that what
inferential process that a reasonable/prudent man would adopt to arrive at
a conclusion. (Emphasis supplied)
52. The third concept is that of a promoter. Promoter is defined by Section
2(69) of the Companies Act, 2013 as follows:
(69) Promoter means a person
(a) Who has been named as such in a prospectus or is identified by the
company in the annual return referred to in Section 92; or
(b) Who has control over the affairs of the company, directly or
indirectly whether as a shareholder, director or otherwise; or
(c) In accordance with whose advice, directions or instructions the
Board of Directors of the company is accustomed to act:
Provided that nothing in sub-clause (c) shall apply to a person who is acting
merely in a professional capacity;
53. Here again, sub-clause (a) refers to a de jure position, namely, where a
person is expressly named in a prospectus or identified by the company in an
annual return as a promoter. Sub- clauses (b) and (c) speak of a de facto
position. Under sub-clause (b), so long as a person has control over the affairs
of a company, directly or indirectly, in any manner, he could be said to be a
promoter of such company. Under sub-clause (c), such person need not be a
member of the Board of Directors of a company, but can be a person who in
fact advises, directs or instructs the Board to act. Under the proviso, only a
person who acts in a professional capacity is excluded from the talons of sub-
clause (c).
54. The interpretation of Section 29A(c) now becomes clear. Any person
who wishes to submit a resolution plan, if he or it does so acting jointly, or in
concert with other persons, which person or other persons happen to either
manage or control or be promoters of a corporate debtor, who is classified as a
non-performing asset and whose debts have not been paid off for a period of
at least one year before commencement of the corporate insolvency resolution
process, becomes ineligible to submit a resolution plan. This provision
therefore ensures that if a person wishes to submit a resolution plan, and if
such person or any person acting jointly or any person in concert with such
person, happens to either manage, control, or be promoter of a corporate
debtor declared as a non-performing asset one year before the corporate
insolvency resolution process begins, is ineligible to submit a resolution plan.
The first proviso to sub-clause (c) makes it clear that the ineligibility can only
(2021) ABC 59
be removed if the person submitting a resolution plan makes payment of all
overdue amounts with interest thereon and charges relating to the non-
performing asset in question before submission of a resolution plan. The
position in law is thus clear. Any person who wishes to submit a resolution
plan acting jointly or in concert with other persons, any of whom may either
manage, control or be a promoter of a corporate debtor classified as a non-
performing asset in the period abovementioned, must first pay off the debt of
the said corporate debtor classified as a non-performing asset in order to
become eligible under Section 29A(c).
55. However, Messrs Salve and Singhvi have argued that the expression
before submission of resolution plan contained in the proviso must be read in
a commercially sensible manner. The provision must, therefore, be interpreted
to make it workable, and create a situation so that banks can recover the
maximum possible amounts from the NPAs generally, and not merely from
the NPAs of the corporate debtor in respect of which it is receiving resolution
plans. In this context, therefore, if there is a system by which a person who
presents a resolution plan can pay off the entire amount of the NPAs as a part
of its resolution plan, to be appropriated before the resolution plan is accepted
and implemented, it would fully subserve the object of both the proviso and
the statute generally. According to them, the words of a statute can be altered
suitably to avoid hardship or absurdity. We are afraid that we cannot accept
the aforesaid submission. The plain language of the proviso makes it clear,
that ineligibility can only be removed if the necessary payment is made before
submission of a resolution plan. It is not possible to accede to the argument
that, commercially speaking, no person would ever make a speculative bid,
where he would pay off the debt of another related corporate debtor, classified
as an NPA, without being certain that his resolution plan would be accepted,
as this would narrow the pool of resolution applicants to nil, and therefore
stultify the object sought to be achieved by the proviso to Section 29A(c).
First, it is clear that there may be persons who may submit resolution plans,
either by themselves, or in concert, or jointly with other persons who do not
have debts which are declared as NPAs. Also, it is very difficult to say that in
no circumstance whatsoever would a person submitting a resolution plan pay
off the NPA dues of another person, with whom it is acting in concert or
jointly. The dues may be such that it may be worth the while of the person,
together with the persons with whom he is acting in concert or jointly, to first
pay off the dues of the concerned corporate debtor whose account has been
declared to be an NPA, as such dues may be negligible when compared with
the gaining of control of the corporate debtor that is sought to be run as a
going concern as per a resolution plan submitted. It is, therefore, impossible to
say that the plain, literal, meaning of the language used by the proviso leads to
absurdity or hardship. This interpretation is also in line with the object sought
to be achieved, namely, that other corporate debtors who are declared as
NPAs, whose debts may never be cleared in full, are required to be cleared as
a condition precedent to submission of a resolution plan under the Code. In
order, therefore, to make the statute workable, as is suggested by Messrs
Salve and Singhvi, we cannot disregard the plain language of the proviso and
substitute words which would have the opposite effect.
56. Since Section 29A(c) is a see-through provision, great care must be taken
to ensure that persons who are in charge of the corporate debtor for whom
such resolution plan is made, do not come back in some other form to regain
control of the company without first paying off its debts. The Code has
bifurcated such persons into two groups, as a perusal of sub-clauses (c) and
(g) of Section 29A shows. If a person has been a promoter, or in the
management, or control, of a corporate debtor in which a preferential
transaction, undervalued transaction, extortionate credit transaction or
fraudulent transaction has taken place, and in respect of which an order has
been made by the Adjudicating Authority under the Code, such person is
ineligible to present a resolution plan under Section 29A(g). This ineligibility
cannot be cured by paying off the debts of the corporate debtor. Therefore, it
is only such persons who do not fall foul of sub-clause (g), who are eligible to
submit resolution plans under sub-clause (c) of Section 29A, if they happen to
be persons who were in the erstwhile management or control of the corporate
debtor.
57. It is important for the competent authority to see that persons, who are
otherwise ineligible and hit by sub-clause (c), do not wriggle out of the
proviso to sub-clause (c) by other means, so as to avoid the consequences of
the proviso. For this purpose, despite the fact that the relevant time for the
ineligibility under sub- clause (c) to attach is the time of submission of the
resolution plan, antecedent facts reasonably proximate to this point of time
can always be seen, to determine whether the persons referred to in Section
29A are, in substance, seeking to avoid the consequences of the proviso to
sub-clause (c) before submitting a resolution plan. If it is shown, on facts,
that, at a reasonably proximate point of time before the submission of the
resolution plan, the affairs of the persons referred to in Section 29A are so
arranged, as to avoid paying off the debts of the non-performing asset
concerned, such persons must be held to be ineligible to submit a resolution
plan, or otherwise both the purpose of the first proviso to sub-section (c) of
Section 29A, as well as the larger objective sought to be achieved by the said
sub-clause in public interest, will be defeated.
58. When we come to sub-clause (f), it is clear that, if any of the persons
mentioned in Section 29A is prohibited by SEBI from either trading in
securities or accessing the securities market again, ineligibility of the person
submitting the resolution plan attaches. Under sub-clause (i), if a person
situate abroad is subject to any disability which corresponds to sub-clause (f),
such person also gets interdicted. In E.V. Mathai v. Subordinate Judge,
Kottayam & Ors., (1969) 2 SCC 194, the expression corresponding to was
explained as follows:-
(2021) ABC 61
It was argued by Mr Daphtary that Section 4 was not applicable because
a different intention appeared from Section 34(1) of the Act of 1965. We
find ourselves unable to accept this contention. The proviso to Section
34(1) lays down that a legal proceeding which could have been
instituted, continued or enforced under the repealed Act of 1959 may be
instituted under the corresponding provisions of the new Act. Mr
Daphtary tried to meet this by urging that Section 11(4) of the Act of
1959 did not contain any corresponding provision. Sub-section (1) of
Section 11 of the 1959 Act laid down that:
Notwithstanding anything to the contrary contained in any other law or
contract a tenant shall not be evicted, whether in execution of a decree or
otherwise except in accordance with the provisions of this Act:
Provided.... Sub-section (4)(i) of Section 11 however gave the landlord a
right to apply for eviction and for an order directing him to be put in
possession of the building:
if the tenant has without the consent of the landlord transferred his right
under the lease or sub-let the entire building or any portion thereof, if the
lease does not confer on him any right to do so, or the landlord has not
consented to such sub-letting; We find ourselves unable to accept Mr
Daphtarys argument that the above quoted provision of Section 11 of the
Act of 1959 was not a corresponding provision within the meaning of the
proviso to subsection (1) of Section 34 of the Act of 1965. To correspond
means to be in harmony with or be similar, analogous to. It does not
mean to be identical with and therefore the relevant provisions of Section
34 (1) of the Act of 1965 must be held to be a provision corresponding to
Section 11(4) of the Act of 1959.
59. In the light thereof, it is clear that if a person is prohibited by a regulator
of the securities market in a foreign country from trading in securities or
accessing the securities market, the disability under sub-clause (i) would then
attach.
60. When we come to sub-clause (j), a connected person is defined as
meaning the three categories of persons mentioned in the three sub-clauses
therein. The first sub-clause of Explanation 1 again takes us back to the same
three definitions of promoter, management and control of the resolution
applicant. Under sub-clause (ii), again, a connected person is a person who is
either the promoter, or in management or control, of the business of the
corporate debtor during implementation of the resolution plan. And under
sub-clause (iii), holding companies, subsidiary companies and associate
companies as defined under the Companies Act, 2013, or related parties of
persons referred to clauses (1) and (2) also become connected persons 1.
61. We now come to the equally important question as to the timelines
within which the insolvency process is to be completed.
62. Previous legislation, namely, the Sick Industrial Companies By the
Insolvency and Bankruptcy Code (Second Amendment) Act of 2018 a new
definition of related party has been inserted with effect from 06.06.2018, as
Section 5(24-A) of the Code, as follows:-
(24-A) related party, in relation to an individual, means
(a) a person who is a relative of the individual or a relative of the
spouse of the individual;
(b) a partner of a limited liability partnership, or a limited liability
partnership or a partnership firm, in which the individual is a
partner;
(c) a person who is a trustee of a trust in which the beneficiary of the
trust includes the individual, or the terms of the trust confers a
power on the trustee which may be exercised for the benefit of the
individual;
(d) a private company in which the individual is a director and holds
along with his relatives, more than two per cent. of its share capital;
(e) a public company in which the individual is a director and holds
along with relatives, more than two per cent. of its paid-up share
capital;
(f) a body corporate whose board of directors, managing director or
manager, in the ordinary course of business, acts on the advice,
directions or instructions of the individual;
(g) a limited liability partnership or a partnership firm whose partners
or employees in the ordinary course of business, act on the advice,
directions or instructions of the individual;
(h) a person on whose advice, directions or instructions, the individual
is accustomed to act;
(i) a company, where the individual or the individual along with its
related party, own more than fifty per cent. of the share capital of
the company or controls the appointment of the board of directors of
the company.
Explanation.For the purposes of this clause,
(a) relative, with reference to any person, means anyone who is related to
another, in the following manner, namely:
(i) members of a Hindu Undivided Family,
(ii) husband,
(iii) wife,
(iv) father,
(v) mother,
(vi) son,
(vii) daughter,
(2021) ABC 63
(viii) son's daughter and son,
(ix) daughter's daughter and son,
(x) grandson's daughter and son,
(xi) granddaughter's daughter and son, (Special Provisions) Act, 1985,
and the Recovery of Debts Due to Banks and Financial Institutions
Act, 1993, which made provision for rehabilitation of sick
companies and repayment of loans availed by them, were found to
have completely failed. This was taken note of by our judgment in
Madras Petrochem Ltd. and Anr. v. Board for Industrial and
Financial Reconstruction and Ors., (2016) 4 SCC 1:
40. An interesting pointer to the direction Parliament has taken after
enactment of the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002 is also of some relevance
in this context. The Eradi Committee Report relating to insolvency and
winding up of companies dated 31.07.2000, observed that out of 3068
cases referred to BIFR from 1987 to 2000 all but 1062 cases have been
disposed of. Out of the cases disposed of, 264 cases were revived, 375
cases were under negotiation for revival process, 741 cases were
recommended for winding up, and 626 cases were dismissed as not
maintainable. These facts and figures speak for themselves and place a
big question mark on the utility of the Sick Industrial Companies
(Special Provisions) Act, 1985. The Committee further pointed out that
effectiveness of the Sick Industrial Companies (Special Provisions) Act,
1985 as has been pointed out earlier, has been severely undermined by
reason of the enormous delays involved in the disposal of cases by BIFR.
(See Paras 5.8, 5.9 and 5.15 of the Report.)
(xii) brother,
(xiii) sister,
(xiv) brother's son and daughter,
(xv) sister's son and daughter, (xvi) father's father and mother, (xvii)
mother's father and mother,
(xviii) father's brother and sister, (xix) mother's brother and sister, and
(b) wherever the relation is that of a son, daughter, sister or brother, their
spouses shall also be included; Consequently, the Committee
recommended that the Sick Industrial Companies (Special Provisions)
Act, 1985 be repealed and the provisions thereunder for revival and
rehabilitation should be telescoped into the structure of the Companies
Act, 1956 itself.
41. Pursuant to the Eradi Committee Report, the Companies Act was
amended in 2002 by providing for the constitution of a National
Company Law Tribunal as a substitute for the Company Law Board, the
High Court, BIFR and AAIFR. The Eradi Committee Report was further
given effect to by inserting Sections 424-A to 424-H into the Companies
Act, 1956 which, with a few changes, mirrored the provisions of Sections
15 to 21 of the Sick Industrial Companies (Special Provisions) Act,
1985. Interestingly, the Companies Amendment Act, 2002 omitted a
provision similar to Section 22(1) of the Sick Industrial Companies
(Special Provisions) Act, 1985. Consequently, creditors were given
liberty to file suits or initiate other proceedings for recovery of dues
despite pendency of proceedings for the revival or rehabilitation of sick
companies before the National Company Law Tribunal.
42. This Amendment Act came under challenge, which challenge
culminated in the Constitution Bench decision in Union of India v. R,
Gandhi, President, Madras Bar Association, (2010) 11 SCC 10 by which
the amendments were upheld, with certain changes recommended by the
Constitution Bench of this Court.
43. Close on the heels of the amendment made to the Companies Act
came the Sick Industrial Companies (Special Provisions) Repeal Act,
2003. This particular Act was meant to repeal the Sick Industrial
Companies (Special Provisions) Act, 1985 consequent to some of its
provisions being telescoped into the Companies Act. Thus, the
Companies Amendment Act, 2002 and the SICA Repeal Act formed part
of one legislative scheme, and neither has yet been brought into force. In
fact, even the Companies Act, 2013, which repeals the Companies Act,
1956, contains Chapter 19 consisting of Sections 253 to 269 dealing with
revival and rehabilitation of sick companies along the lines of Sections
424-A to 424-H of the amended Companies Act, 1956. Conspicuous by
its absence is a provision akin to Section 22(1) of the Sick Industrial
Companies (Special Provisions) Act, 1985 in the 2013 Act. However,
this Chapter is also yet to be brought into force. These statutory
provisions, though not yet brought into force, are also an important
pointer to the fact that Section 22(1) of the Sick Industrial Companies
(Special Provisions) Act, 1985 has been statutorily sought to be
excluded, Parliament veering around from wanting to protect sick
industrial companies and rehabilitate them to giving credence to the
public interest contained in the recovery of public monies owing to banks
and financial institutions. These provisions also show that the aforesaid
construction of the provisions of the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 vis-à-
vis the Sick Industrial Companies (Special Provisions) Act, 1985, leans
in favour of creditors being able to realise their debts outside the court
process over sick industrial companies being revived or rehabilitated. In
fact, another interesting document is the Report on Trend and Progress of
Banking in India 2011-2012 for the year ended 30.06.2012 submitted by
Reserve Bank of India to the Central Government in terms of Section
36(2) of the Banking Regulation Act, 1949. In Table IV.14 the Report
provides statistics regarding trends in non-performing assets bank-wise,
(2021) ABC 65
group-wise. As per the said Table, the opening balance of non-
performing assets in public sector banks for the year 2011-2012 was Rs
746 billion but the closing balance for 2011- 2012 was Rs 1172 billion
only. The total amount recovered through the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 during 2011-2012 registered a decline compared to the
previous year, but, even then, the amounts recovered under the said Act
constituted 70% of the total amount recovered. The amounts recovered
under the Recovery of Debts Due to Banks and Financial Institutions
Act, 1993 constituted only 28%. All this would go to show that the
amounts that public sector banks and financial institutions have to
recover are in staggering figures and at long last at least one statutory
measure has proved to be of some efficacy. This Court would be loathe
to give such an interpretation as would thwart the recovery process under
the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 which Act alone seems to
have worked to some extent at least. (Emphasis supplied)
63. These two enactments were followed by the Securitization and
Reconstruction of Financial Assets and Enforcement of Securities Interest
Act, 2002. As has been noted hereinabove, amounts recovered under the said
Act recorded improvement over the previous two enactments, but this was yet
found to be inadequate.
64. The Code was passed after great deliberation and pursuant to various
Committee Reports, as has been held in Innoventive Industries Ltd. v. ICICI
Bank & Anr. (2018) 1 SCC 407 at paragraph 12. The Statement of Objects
and Reasons, which is reproduced in the said paragraph, makes it clear that
the existing framework for insolvency and bankruptcy was not only
inadequate and ineffective, but resulted in undue delays in resolution. One of
the primary objects of the Code, therefore, is to resolve such matters in a time
bound manner. This would not only support the development of credit
markets and encourage entrepreneurship, but would also improve ease of
doing business and facilitate more investment, leading to higher economic
growth and development.
65. Paragraph 16 of the said judgment refers to the report of November,
2015 of the Bankruptcy Law Reforms Committee and refers to speed being of
essence as follows:
Speed is of essence Speed is of essence for the working of the
bankruptcy code, for two reasons. First, while the calm period can help
keep an organisation afloat, without the full clarity of ownership and
control, significant decisions cannot be made. Without effective
leadership, the firm will tend to atrophy and fail. The longer the delay,
the more likely it is that liquidation will be the only answer. Second, the
liquidation value tends to go down with time as many assets suffer from
a high economic rate of depreciation. From the viewpoint of creditors, a
good realisation can generally be obtained if the firm is sold as a going
concern. Hence, when delays induce liquidation, there is value
destruction. Further, even in liquidation, the realisation is lower when
there are delays. Hence, delays cause value destruction. Thus, achieving
a high recovery rate is primarily about identifying and combating the
sources of delay.
66. The Committee then chose certain principles within which the new
Insolvency and Bankruptcy Code would work. One of them is that the Code
will ensure a time bound process, which will not be extended, to better
preserve the economic value of the asset (see Principle No.8 set out at page
427 of Innoventive Industries (supra.)).
67. After setting out the Scheme of the Code, this Court further went on to
hold:
31. The rest of the insolvency resolution process is also very important.
The entire process is to be completed within a period of 180 days from
the date of admission of the application under Section 12 and can only be
extended beyond 180 days for a further period of not exceeding 90 days
if the committee of creditors by a voting of 75% of voting shares so
decides. It can be seen that time is of essence in seeing whether the
corporate body can be put back on its feet, so as to stave off liquidation.
xxx xxx xxx
33. Under Section 30, any person who is interested in putting the
corporate body back on its feet may submit a resolution plan to the
resolution professional, which is prepared on the basis of an information
memorandum. This plan must provide for payment of insolvency
resolution process costs, management of the affairs of the corporate
debtor after approval of the plan, and implementation and supervision of
the plan. It is only when such plan is approved by a vote of not less than
75% of the voting share of the financial creditors and the adjudicating
authority is satisfied that the plan, as approved, meets the statutory
requirements mentioned in Section 30, that it ultimately approves such
plan, which is then binding on the corporate debtor as well as its
employees, members, creditors, guarantors and other stakeholders.
Importantly, and this is a major departure from previous legislation on
the subject, the moment the adjudicating authority approves the
resolution plan, the moratorium order passed by the authority under
Section 14 shall cease to have effect. The scheme of the Code, therefore,
is to make an attempt, by divesting the erstwhile management of its
powers and vesting it in a professional agency, to continue the business
of the corporate body as a going concern until a resolution plan is drawn
up, in which event the management is handed over under the plan so that
the corporate body is able to pay back its debts and get back on its feet.
All this is to be done within a period of 6 months with a maximum
(2021) ABC 67
extension of another 90 days or else the chopper comes down and the
liquidation process begins.
68. It is in this backdrop that we must consider the provisions of the Code,
insofar as the Code requires either that the corporate debtor be taken over by
another management and run as a going concern or, if that fails, go into
liquidation. Some of the relevant provisions of the Code, insofar as this case is
concerned, are set out herein below:
5. (12) insolvency commencement date means the date of admission of
an application for initiating corporate insolvency resolution process by
the Adjudicating Authority under Sections 7, 9 or Section 10, as the case
may be:
Provided that where the interim resolution professional is not appointed
in the order admitting application under Section 7, 9 or Section 10, the
insolvency commencement date shall be the date on which such interim
resolution professional is appointed by the Adjudicating Authority;
xxx xxx xxx (14) insolvency resolution process period means the period
of one hundred and eighty days beginning from the insolvency
commencement date and ending on one hundred and eightieth day;
xxx xxx xxx (25) resolution applicant means a person, who individually
or jointly with any other person, submits a resolution plan to the
resolution professional pursuant to the invitation made under Clause (h)
of sub-section (2) of Section 25;
(26) Resolution plan means a plan proposed by resolution applicant for
insolvency resolution of the corporate debtor as a going concern in
accordance with Part II;
(27) resolution professional, for the purposes of this Part, means an
insolvency professional appointed to conduct the corporate insolvency
resolution process and includes an interim resolution professional; xxx
xxx xxx
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 sub-section, 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. (2) The financial creditor shall make an application under sub-
section (1) in such form and manner and accompanied with such fee as
may be prescribed. (3) The financial creditor shall, along with the
application furnish
(a) Record of the default recorded with the information utility or such
other record or evidence of default as may be specified;
(b) The name of the resolution professional proposed to act as an
interim resolution professional; and
(c) Any other information as may be specified by the Board.
(4) The Adjudicating Authority shall, within fourteen days of the receipt
of the application under sub-section (2), ascertain the existence of a
default from the records of an information utility or on the basis of other
evidence furnished by the financial creditor under sub- section (3).
(5) Where the Adjudicating Authority is satisfied that
(a) a default has occurred and the application under sub-section (2) is
complete, and there is no disciplinary proceedings pending against the
proposed resolution professional, it may, by order, admit such
application; or
(b) default has not occurred or the application under sub-section (2) is
incomplete or any disciplinary proceeding is pending against the
proposed resolution professional, it may, by order, reject such
application: Provided that the Adjudicating Authority shall, before
rejecting the application under clause (b) of sub- section (5), give a
notice to the applicant to rectify the defect in his application within seven
days of receipt of such notice from the Adjudicating Authority. (6) The
corporate insolvency resolution process shall commence from the date of
admission of the application under sub-section (5).
(7) The Adjudicating Authority shall communicate
(a) the order under clause (a) of sub-section (5) to the financial creditor
and the corporate debtor;
(b) the order under clause (b) of sub-section (5) to the financial creditor,
within seven days of admission or rejection of such application, as the
case may be.
xxx xxx xxx
12. Time-limit for completion of insolvency resolution process.(1)
Subject to sub-section (2), the corporate insolvency resolution process
shall be completed within a period of one hundred and eighty days from
the date of admission of the application to initiate such process.
(2) The resolution professional shall file an application to the
Adjudicating Authority to extend the period of the corporate insolvency
resolution process beyond one hundred and eighty days, if instructed to
do so by a resolution passed at a meeting of the committee of creditors
by a vote of sixty-six per cent of the voting shares.
(3) On receipt of an application under sub-section (2), if the Adjudicating
Authority is satisfied that the subject- matter of the case is such that
corporate insolvency resolution process cannot be completed within one
(2021) ABC 69
hundred and eighty days, it may by order extend the duration of such
process beyond one hundred and eighty days by such further period as it
thinks fit, but not exceeding ninety days:
Provided that any extension of the period of corporate insolvency
resolution process under this section shall not be granted more than once.
xxx xxx xxx
30. Submission of resolution plan.(1) A resolution applicant may submit
a resolution plan along with an affidavit stating that he is eligible under
Section 29-A to the resolution professional prepared on the basis of the
information memorandum.
(2) The resolution professional shall examine each resolution plan
received by him to confirm that each resolution plan
(a) provides for the payment of insolvency resolution process costs in a
manner specified by the Board in priority to the payment of other debts
of the corporate debtor;
(b) provides for the payment of the debts of operational creditors in such
manner as may be specified by the Board which shall not be less than the
amount to be paid to the operational creditors in the event of a
liquidation of the corporate debtor under Section 53;
(c) provides for the management of the affairs of the corporate debtor
after approval of the resolution plan;
(d) the implementation and supervision of the resolution plan;
(e) does not contravene any of the provisions of the law for the time
being in force;
(f) conforms to such other requirements as may be specified by the
Board.
Explanation.For the purposes of clause (e), if any approval of
shareholders is required under the Companies Act, 2013 (18 of 2013) or
any other law for the time being in force for the implementation of
actions under the resolution plan, such approval shall be deemed to have
been given and it shall not be a contravention of that Act or law.
(3) The resolution professional shall present to the committee of creditors
for its approval such resolution plans which confirm the conditions
referred to in sub- section (2).
(4) The committee of creditors may approve a resolution plan by a vote
of not less than sixty-six per cent of voting share of the financial
creditors, after considering its feasibility and viability, and such other
requirements as may be specified by the Board: Provided that the
committee of creditors shall not approve a resolution plan, submitted
before the commencement of the Insolvency and Bankruptcy Code
(Amendment) Ordinance, 2017 (Ord. 7 of 2017), where the resolution
applicant is ineligible under Section 29-A and may require the resolution
professional to invite a fresh resolution plan where no other resolution
plan is available with it: Provided further that where the resolution
applicant referred to in the first proviso is ineligible under Clause (c) of
Section 29-A, the resolution applicant shall be allowed by the committee
of creditors such period, not exceeding thirty days, to make payment of
overdue amounts in accordance with the proviso to clause (c) of Section
29-A:
Provided also that nothing in the second proviso shall be construed as
extension of period for the purposes of the proviso to sub-section (3) of
Section 12, and the corporate insolvency resolution process shall be
completed within the period specified in that sub- section. Provided also
that the eligibility criteria in Section 29-A as amended by the Insolvency
and Bankruptcy Code (Amendment) Ordinance, 2018 (Ord. 6 of 2018)
shall apply to the resolution applicant who has not submitted resolution
plan as on the date of commencement of the Insolvency and Bankruptcy
Code (Amendment) Ordinance, 2018.
(5) The resolution applicant may attend the meeting of the committee of
creditors in which the resolution plan of the applicant is considered:
Provided that the resolution applicant shall not have a right to vote at the
meeting of the committee of creditors unless such resolution applicant is
also a financial creditor.
(6) The resolution professional shall submit the resolution plan as
approved by the committee of creditors to the Adjudicating Authority.
31. Approval of resolution plan.(1) If the Adjudicating Authority is
satisfied that the resolution plan as approved by the committee of
creditors under sub-section (4) of Section 30 meets the requirements as
referred to in sub-section (2) of Section 30, it shall by order approve the
resolution plan which shall be binding on the corporate debtor and its
employees, members, creditors, guarantors and other stakeholders
involved in the resolution plan:
Provided that the Adjudicating Authority shall, before passing an order
for approval of resolution plan under this sub-section, satisfy that the
resolution plan has provisions for its effective implementation. (2) Where
the Adjudicating Authority is satisfied that the resolution plan does not
confirm to the requirements referred to in sub-section (1), it may, by an
order, reject the resolution plan.
(3) After the order of approval under sub-section (1),
(a) the moratorium order passed by the Adjudicating Authority under
Section 14 shall cease to have effect; and
(b) the resolution professional shall forward all records relating to the
conduct of the corporate insolvency resolution process and the resolution
plan to the Board to be recorded on its database.
(2021) ABC 71
(4) The resolution applicant shall, pursuant to the resolution plan
approved under sub-section (1), obtain the necessary approval required
under any law for the time being in force within a period of one year
from the date of approval of the resolution plan by the Adjudicating
Authority under sub-section (1) or within such period as provided for in
such law, whichever is later:
Provided that where the resolution plan contains a provision for
combination, as referred to in Section 5 of the Competition Act, 2002 (12
of 2003), the resolution applicant shall obtain the approval of the
Competition Commission of India under that Act prior to the approval of
such resolution plan by the committee of creditors.
32. Appeal.Any appeal from an order approving the resolution plan shall
be in the manner and on the grounds laid down in sub-section (3) of
Section 61. xxx xxx xxx
33. Initiation of liquidation.(1) Where the Adjudicating Authority,
(a) before the expiry of the insolvency resolution process period or the
maximum period permitted for completion of the corporate insolvency
resolution process under Section 12 or the fast track corporate insolvency
resolution process under Section 56, as the case may be, does not receive
a resolution plan under sub-section (6) of Section 30; or
(b) rejects the resolution plan under Section 31 for the non-compliance of
the requirements specified therein, it shall
(i) pass an order requiring the corporate debtor to be liquidated in the
manner as laid down in this Chapter;
(ii) issue a public announcement stating that the corporate debtor is in
liquidation; and
(iii) require such order to be sent to the authority with which the
corporate debtor is registered. (2) Where the resolution professional, at
any time during the corporate insolvency resolution process but before
confirmation of resolution plan, intimates the Adjudicating Authority of
the decision of the committee of creditors approved by not less than
sixty-six per cent of the voting share to liquidate the corporate debtor, the
Adjudicating Authority shall pass a liquidation order as referred to in
sub-clauses (i), (ii) and (iii) of Clause (b) of sub-section (1).
(3) Where the resolution plan approved by the Adjudicating Authority is
contravened by the concerned corporate debtor, any person other than the
corporate debtor, whose interests are prejudicially affected by such
contravention, may make an application to the Adjudicating Authority
for a liquidation order as referred to in sub-clauses (i), (ii) and (iii) of
clause (b) of sub- section (1).
(4) On receipt of an application under sub-section (3), if the Adjudicating
Authority determines that the corporate debtor has contravened the
provisions of the resolution plan, it shall pass a liquidation order as
referred to in sub-clauses (i), (ii) and (iii) of clause (b) of sub-section (1).
(5) Subject to Section 52, when a liquidation order has been passed, no
suit or other legal proceeding shall be instituted by or against the
corporate debtor: Provided that a suit or other legal proceeding may be
instituted by the liquidator, on behalf of the corporate debtor, with the
prior approval of the Adjudicating Authority.
(6) The provisions of sub-section (5) shall not apply to legal proceedings
in relation to such transactions as may be notified by the Central
Government in consultation with any financial sector regulator. (7) The
order for liquidation under this section shall be deemed to be a notice of
discharge to the officers, employees and workmen of the corporate
debtor, except when the business of the corporate debtor is continued
during the liquidation process by the liquidator.
xxx xxx xxx
60. Adjudicating Authority for corporate persons. (1) The Adjudicating
Authority, in relation to insolvency resolution and liquidation for
corporate persons including corporate debtors and personal guarantors
thereof shall be the National Company Law Tribunal having territorial
jurisdiction over the place where the registered office of the corporate
person is located. (2) Without prejudice to sub-section (1) and
notwithstanding anything to the contrary contained in this Code, where a
corporate insolvency resolution process or liquidation proceeding of a
corporate debtor is pending before a National Company Law Tribunal,
an application relating to the insolvency resolution or liquidation or
bankruptcy of a corporate guarantor or personal guarantor, as the case
may be, of such corporate debtor shall be filed before such National
Company Law Tribunal.
(3) An insolvency resolution process or liquidation or bankruptcy
proceeding of a corporate guarantor or personal guarantor, as the case
may be, of the corporate debtor pending in any court or tribunal shall
stand transferred to the Adjudicating Authority dealing with insolvency
resolution process or liquidation proceeding of such corporate debtor.
(4) The National Company Law Tribunal shall be vested with all the
powers of the Debts Recovery Tribunal as contemplated under Part III of
this Code for the purpose of sub-section (2).
(5) Notwithstanding anything to the contrary contained in any other law
for the time being in force, the National Company Law Tribunal shall
have jurisdiction to entertain or dispose of
(a) any application or proceeding by or against the corporate debtor or
corporate person;
(2021) ABC 73
(b) any claim made by or against the corporate debtor or corporate
person, including claims by or against any of its subsidiaries situated in
India; and
(c) any question of priorities or any question of law or facts, arising out
of or in relation to the insolvency resolution or liquidation proceedings of
the corporate debtor or corporate person under this Code. (6)
Notwithstanding anything contained in the Limitation Act, 1963 (36 of
1963) or in any other law for the time being in force, in computing the
period of limitation specified for any suit or application by or against a
corporate debtor for which an order of moratorium has been made under
this Part, the period during which such moratorium is in place shall be
excluded.
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 may
be filed on grounds of material irregularity or fraud committed in relation
to such a liquidation order.
62. Appeal to Supreme Court.(1) Any person aggrieved by an order of
the National Company Law Appellate Tribunal may file an appeal to the
Supreme Court on a question of law arising out of such order under this
Code within forty-five days from the date of receipt of such order.
(2) The Supreme Court may, if it is satisfied that a person was prevented
by sufficient cause from filing an appeal within forty-five days, allow the
appeal to be filed within a further period not exceeding fifteen days. xxx
xxx xxx
64. Expeditious disposal of applications.(1) Where an application is not
disposed of or an order is not passed within the period specified in this
Code, the National Company Law Tribunal or the National Company
Law Appellate Tribunal, as the case may be, shall record the reasons for
not doing so within the period so specified; and the President of the
National Company Law Tribunal or the Chairperson of the National
Company Law Appellate Tribunal, as the case may be, may, after taking
into account the reasons so recorded, extend the period specified in the
Act but not exceeding ten days.
(2) No injunction shall be granted by any court, tribunal or authority in
respect of any action taken, or to be taken, in pursuance of any power
conferred on the National Company Law Tribunal or the National
Company Law Appellate Tribunal under this Code.
69. Since the present case deals, on facts, with financial creditors, we may
set out how the corporate insolvency resolution process is to work from the
inception. Before admission of an application under Section 7 by a financial
creditor, the Adjudicating Authority is, under Section 7(4), to first ascertain
the existence of a default within 14 days of receipt of the application, as
specified in Section 7(4). Upon satisfaction that such default has occurred, it
may then admit such application, subject to rectification of defects, which the
proviso in Section 7(5) says must be done within 7 days of receipt of such
notice from the Adjudicating Authority by the applicant. The time frame
within which ascertainment of default is to take place, as well as the time
within which the defect is to be rectified, have both been held by a judgment
of this Court to be directory in nature, the reason being that the stage of these
provisions is before admission of the application (see Surendra Trading Co. v.
Juggilal Kamlapat Jute Mills Company Ltd. & Ors. (2017) 16 SCC 143). The
corporate insolvency resolution process commences from the date of
admission of the application vide Section 7(6). Section 7(7) makes it
incumbent upon the Adjudicating Authority to communicate the order
accepting or rejecting the application to the financial creditor and the
corporate debtor within a period of 7 days of such admission or rejection.
70. The time limit for completion of the insolvency resolution process is laid
down in Section 12. A period of 180 days from the date of admission of the
application is given by Section 12(1). This is extendable by a maximum
period of 90 days only if the Committee of Creditors, by a vote of 66% 2,
votes to extend the It is pertinent to note that the Insolvency and Bankruptcy
Code (Second Amendment) Act, 2018 (26 of 2018), inter alia amended the
Code, with retrospective effect from 6 th June, 2018, in so far as the
requirement in certain sections of approval of 75% of the Committee of
(2021) ABC 75
Creditors for various decisions was reduced to 51% in said period, and only if
the Adjudicating Authority is satisfied that such process cannot be completed
within 180 days. The authority may then, by order, extend the duration of
such process by a maximum period of 90 days (see Sections 12(2) and 12(3)).
What is also of importance is the proviso to Section 12(3) which states that
any extension of the period under Section 12 cannot be granted more than
once. This has to be read with the third proviso to Section 30(4), which states
that the maximum period of 30 days mentioned in the second proviso is
allowable as the only exception to the extension of the aforesaid period not
being granted more than once.
71. What is important to note is that a consequence is provided, in the event
that the said period ends either without receipt of a resolution plan or after
rejection of a resolution plan under Section 31. This consequence is provided
by Section 33, which makes it clear that when either of these two
contingencies occurs, the corporate debtor is required to be liquidated in the
manner laid down in Chapter III. Section 12, construed in the light of the
object sought to be achieved by the Code, and in the light of the consequence
provided by Section 33, therefore, makes it clear Section 21(8) (i.e. the
minimum percentage of votes required for any decision of the Committee,
where not otherwise provided for in the Code), and to 66% in Sections 12(2)
(i.e. extension of time for completion of the process by 90 days), 22(2) (i.e.
appointment of resolution professional), 27(2) (i.e. replacement of resolution
professional), 28(3) (i.e. approval for certain actions by the resolution
professional), 30(4) (i.e. approval of resolution plan), and 33(2) (i.e. initiation
of liquidation). that the periods previously mentioned are mandatory and
cannot be extended.
72. In fact, even the literal language of Section 12(1) makes it clear that the
provision must read as being mandatory. The expression shall be completed is
used. Further, sub-section (3) makes it clear that the duration of 180 days may
be extended further but not exceeding 90 days, making it clear that a
maximum of 270 days is laid down statutorily. Also, the proviso to Section 12
makes it clear that the extension shall not be granted more than once.
73. After admission of the application under Section 7 by the Adjudicating
Authority, the scheme of the Code is as follows: .(i) Under Sections 13 to 15,
a moratorium is declared; a public nnouncement of the initiation of the
corporate insolvency resolution process and call for submission of claims is
made; and an Interim Resolution Professional is to be appointed under Section
16 of the Code. This action is to be completed by the Adjudicating Authority
within a period of 14 days from the insolvency commencement date, i.e., the
date of admission of the application under Section 7 by the Adjudicating
Authority.
(ii) Under Section 17, the corporate debtors affairs are to be managed by
the Interim Resolution Professional so appointed, and the Board of
Directors of the corporate debtor shall stand superseded. The officers and
managers of the corporate debtor are now to report to the Interim
Resolution Professional, who has the authority to act on behalf of the
corporate debtor.
(iii) Under Section 18(1), some of the important duties of this Interim
Resolution Professional are set out, which are to collect all information
relating to the financial position of the corporate debtor and, most
importantly, to constitute a Committee of Creditors. That this has to be
done at the very earliest, is clear from the scheme of the corporate
insolvency resolution process which, as has been stated earlier, cannot
exceed the maximum period of 270 days from the date of admission of
the financial creditors application.
(iv) Under Section 21, the Interim Resolution Professional is to
constitute this Committee of Creditors after collating all claims received
against the corporate debtor and after determination of the financial
position of the corporate debtor, both of which need to be done at the
very earliest. This Committee of Creditors is to comprise of financial
creditors of the corporate debtor. All decisions of this Committee of
Creditors are to be taken by a majority vote of not less than 51% of the
voting share of each financial creditor.
(v) Under Section 22, the first meeting of the Committee of Creditors is
to be held within 7 days of its constitution in order to appoint a
Resolution Professional. The Committee of Creditors either continues the
Interim Resolution Professional or replaces the Interim Resolution
Professional by a majority vote of 66%. The application to replace the
Interim Resolution Professional is then to be sent to the Adjudicating
Authority, who is to forward the same to the Insolvency and Bankruptcy
Board of India (hereinafter referred to as the IBBI) for confirmation.
Upon such confirmation, the Adjudicating Authority then appoints the
Resolution Professional. In case the IBBI does not confirm the name of
the proposed Resolution Professional within 10 days of receipt of the
same, the Adjudicating Authority is then to direct the Interim Resolution
Professional to continue to function as the Resolution Professional until
such time as the IBBI confirms the appointment of the Resolution
Professional.
(vi) It is this Resolution Professional who is then to conduct the
corporate insolvency resolution process, which really begins at this stage
(see Section 23). Section 25 then lays down some of the duties of this
Resolution Professional, which are to continue the business operations of
the corporate debtor, subject to the prior approval of the Committee of
Creditors over the matters stated in Section 28. One of the important
duties of the Resolution Professional under Section 25 is to invite
prospective resolution applicants to submit resolution plans.
(vii) Under Section 29, the Resolution Professional is to prepare an
information memorandum giving relevant information, as may be
(2021) ABC 77
specified by the IBBI, to persons interested in formulating a resolution
plan.
(viii) Section 30 is an important provision in that a resolution applicant
may submit a resolution plan to the Resolution Professional, who is then
to examine the said plan to see that it conforms to the requirements of
Section 30(2). Once this plan conforms to such requirements, the plan is
then to be presented to the Committee of Creditors for its approval under
Section 30(3). This can then be approved by the Committee of Creditors
by a vote of not less than 66% under sub-section (4). What is important
to note is that the Committee of Creditors shall not approve a resolution
plan where the resolution applicant is ineligible under Section 29A, and
may require the Resolution Professional to invite a fresh resolution plan
where no other resolution plan is available. Once approved by the
Committee of Creditors, the resolution plan is to be submitted to the
Adjudicating Authority under Section 31 of the Code. It is at this stage
that a judicial mind is applied by the Adjudicating Authority to the
resolution plan so submitted, who then, after being satisfied that the plan
meets (or does not meet) the requirements mentioned in Section 30, may
either approve or reject such plan.
(ix) An appeal from an order approving such plan is only on the limited
grounds laid down in Section 61(3). However, an appeal from an order
rejecting a resolution plan would also lie under Section 61.
(x) As has been stated hereinbefore, the liquidation process gets initiated
under Section 33 if, (1) either no resolution plan is submitted within the
time specified under Section 12, or a resolution plan has been rejected by
the Adjudicating Authority; (2) where the Resolution Professional,
before confirmation of the resolution plan, intimates the Adjudicating
Authority of the decision of the Committee of Creditors to liquidate the
corporate debtor; or (3) where the resolution plan approved by the
Adjudicating Authority is contravened by the concerned corporate
debtor. Any person other than the corporate debtor whose interests are
prejudicially affected by such contravention may apply to the
Adjudicating Authority, who may then pass a liquidation order on such
application.
74. Regulation 40A of the CIRP Regulations presents a model timeline of
the corporate insolvency resolution process, on the basis that the time
available is 180 days. It states as follows:-
40A. Model time-line for corporate insolvency resolution process.
The following Table presents a model timeline of corporate insolvency
resolution process on the assumption that the interim resolution professional
is appointed on the date of commencement of the process and the time
available is hundred and eighty days:
Section/ Description of Activity Norm Latest
Regulation Timeline
Section 16(1) Commencement Within 3 Days of Timelin
Regulation 6(1) of CIRP and Appointment of IRP e
appointment of IRP For 14 Days from T
Section 15(1)
Appointment of IRP
(c)/Regulations Public announcement T+3
Up to 90th day of
6(2) inviting claims T+14
commencement
Submission of claims
(c) and 12 (1) T+90
Submission of claims
Regulation 12(2) T+21
Verification of
Regulation 13(1)
claims received
Regulation 13(2) under regulation Within 7 days from the T+97
Section 21(6A) 12(1) Verification of receipt of the claim T+23
claims received under Within 2 days from
(b)/Regulation
regulation 12(2) verification of claims
16A
received under
Application for
appointment of AR
Report certifying
Regulation 17(1) constitution of CoC 1st regulation 12(1) T+23
meeting of the CoC Within 7 days of the T+30
Resolution to appoint constitution of the T+30
RP by the CoC CoC, but with seven
Appointment of RP IRP days In the first
performs the functions meeting of the CoC On
of approval by the AA If
RP is not appointed by
Regulation 27 RP till the RP is 40th day of T+40
Section appointed. commencement T+47
Within 7 days of
12A/Regulation Appointment of valuer W
appointment of RP, but
30A Submission of W+7
not later than 40th day
application for of commencement
withdrawal of Before issue of EoI
application Within 7 days of
admitted. its receipt or 7 days of
CoC to dispose constitution of CoC,
of the application whichever is later.
Regulation 35A Filing application of Within 3 days of W+10
Regulation 36(1) withdrawal, if approved approval by CoC T+75
by with 90 % CoC Within 75 days of the T+115
majority voting, by RP commencement
to AA T+135
Within 115 days of
RP to form an opinion commencement T+54
on preferential and other Within 135 days to T+75
transactions commencement
RP to make a Within 2 weeks
Determination on of appointment of RP,
(2021) ABC 79
preferential and other but not later than 54th
transactions RP to file day of
applications to AA for commencement
appropriate relief Within 75 days
Submission of IM to of
CoC
Regulation 36A Publish Form G Commencement T+90
Invitation of EoI At least 15 days T+100
Submission of EoI
from issue of
Provisional List of RAs
by RP EoI (Assume 15 days)
Within 10 days from
the last day of receipt
of
EoI
Submission of For 5 days from the T+105
objections to provisional date of provisional list T+115
list Final List of RAs by Within 10 days of the
T+105
RP Issue of RFRP, receipt of objections
including Evaluation Within 5 days of the
Matrix and IM issue of the provisional
list
Regulation 36B Receipt of Resolution At least 30 days from T+135
Regulation 39(4) Plans Submission of issue of RFRP T+165
CoC approved (Assume 30 days) As
Section 31(1) T=180
Resolution Plan to AA soon as approved by
Approval of resolution the CoC
plan by AA
AA: Adjudicating Authority; AR: Authorised
Representative; CIRP: Corporate Insolvency
Resolution Process; CoC: Committee of Creditors; EoI: Expression of
Interest; IM:
Information Memorandum; IRP: Interim Resolution Professional; RA:
Resolution Applicant; RP: Resolution Professional; RFRP:
Request for Resolution Plan. It is of utmost importance for all authorities
concerned to follow this model timeline as closely as possible.
75. What has now to be determined is whether any challenge can be made at
various stages of the corporate insolvency resolution process. Suppose a
resolution plan is turned down at the threshold by a Resolution Professional
under Section 30(2). At this stage is it open to the concerned resolution
applicant to challenge the Resolution Professionals rejection? It is settled law
that a statute is designed to be workable, and the interpretation thereof should
be designed to make it so workable. In Commissioner of Income Tax, Delhi v.
S. Teja Singh, (1959) Supp. 1 S.C.R. 394, this Court said, at page 403:
We must now refer to an aspect of the question, which strongly
reinforces the conclusion stated above. On the construction contended for
by the respondent, S.18-A(9)(b) would become wholly nugatory, as
SS.22(1) and 22(2) can have no application to advance estimates to be
furnished under Sec.18-A(3), and if we accede to this contention, we
must hold that though the legislature enacted Sec.18-A(9)(b) with the
very object of bringing the failure to send estimates under Sec.18-A(3)
within the operation of Sec.28, it signally failed to achieve its object. A
construction which leads to such a result must, if that is possible, be
avoided, on the principle expressed in the maxim, “ut res magis valeat
quam pereat”. Vide Curtis v. Stovin, (1889) 22 Q.B.D.513 and in
particular the following observations of Fry, L. J., at page 519:
“The only alternative construction offered to us would lead to this result,
that the plain intention of the legislature has entirely failed by reason of a
slight inexactitude in the language of the section. If we were to adopt this
construction, we should be construing the Act in order to defeat its object
rather than with a view to carry its object into effect”.
Vide also Craies on Statute Law, p. 90 and Maxwell on The
Interpretation of Statutes, Tenth Edn., pp. 236-237. "A statute is
designed", observed Lord Dunedin in Whitney v. Commissioners of
Inland Revenue, (1925) 10 Tax Cas.88, 110, "to be workable, and the
interpretation thereof by a court should be to secure that object, unless
crucial omission or clear direction makes that end unattainable”.
76. Given the timeline referred to above, and given the fact that a resolution
applicant has no vested right that his resolution plan be considered, it is clear
that no challenge can be preferred to the Adjudicating Authority at this stage.
A writ petition under Article 226 filed before a High Court would also be
turned down on the ground that no right, much less a fundamental right, is
affected at this stage. This is also made clear by the first proviso to Section
30(4), whereby a Resolution Professional may only invite fresh resolution
plans if no other resolution plan has passed muster.
77. However, it must not be forgotten that a Resolution Professional is only
to examine and confirm that each resolution plan conforms to what is
provided by Section 30(2). Under Section 25(2)(i), the Resolution
Professional shall undertake to present all resolution plans at the meetings of
the Committee of Creditors. This is followed by Section 30(3), which states
that the Resolution Professional shall present to the Committee of Creditors,
for its approval, such resolution plans which confirm the conditions referred
to in sub-section (2). This provision has to be read in conjunction with Section
25(2)(i), and with the second proviso to Section 30(4), which provides that
where a resolution applicant is found to be ineligible under Section 29A(c),
the resolution applicant shall be allowed by the Committee of Creditors such
period, not exceeding 30 days, to make payment of overdue amounts in
accordance with the proviso to Section 29A(c). A conspectus of all these
(2021) ABC 81
provisions would show that the Resolution Professional is required to
examine that the resolution plan submitted by various applicants is complete
in all respects, before submitting it to the Committee of Creditors. The
Resolution Professional is not required to take any decision, but merely to
ensure that the resolution plans submitted are complete in all respects before
they are placed before the Committee of Creditors, who may or may not
approve it. The fact that the Resolution Professional is also to confirm that a
resolution plan does not contravene any of the provisions of law for the time-
being in force, including Section 29A of the Code, only means that his prima
facie opinion is to be given to the Committee of Creditors that a law has or
has not been contravened. Section 30(2)(e) does not empower the Resolution
Professional to decide whether the resolution plan does or does not contravene
the provisions of law. Regulation 36A of the CIRP Regulations specifically
provides as follows:-
(8) The resolution professional shall conduct due diligence based on the
material on record in order to satisfy that the prospective resolution
applicant complies with-
(a) the provisions of clause (h) of sub-section (2) of Section 25;
(b) the applicable provisions of Section 29A, and
(c) other requirements, as specified in the invitation for expression of
interest.
(9) The resolution professional may seek any clarification or additional
information or document from the prospective resolution applicant for
conducting due diligence under sub-regulation (8).
(10) The resolution professional shall issue a provisional list of eligible
prospective resolution applicants within ten days of the last date for
submission of expression of interest to the committee and to all
prospective resolution applicants who submitted the expression of
interest. (11) Any objection to inclusion or exclusion of a prospective
resolution applicant in the provisional list referred to in sub-regulation
(10) may be made with supporting documents within five days from the
date of issue of the provisional list.
(12) On considering the objections received under sub- regulation (11),
the resolution professional shall issue the final list of prospective
resolution applicants within ten days of the last date for receipt of
objections, to the committee.
78. Thus, the importance of the Resolution Professional is to ensure that a
resolution plan is complete in all respects, and to conduct a due diligence in
order to report to the Committee of Creditors whether or not it is in order.
Even though it is not necessary for the Resolution Professional to give reasons
while submitting a resolution plan to the Committee of Creditors, it would be
in the fitness of things if he appends the due diligence report carried out by
him with respect to each of the resolution plans under consideration, and to
state briefly as to why it does or does not conform to the law.
79. Take the next stage under Section 30. A Resolution Professional has
presented a resolution plan to the Committee of Creditors for its approval, but
the Committee of Creditors does not approve such plan after considering its
feasibility and viability, as the requisite vote of not less than 66% of the
voting share of the financial creditors is not obtained. As has been mentioned
hereinabove, the first proviso to Section 30(4) furnishes the answer, which is
that all that can happen at this stage is to require the Resolution Professional
to invite a fresh resolution plan within the time limits specified where no other
resolution plan is available with him. It is clear that at this stage again no
application before the Adjudicating Authority could be entertained as there is
no vested right or fundamental right in the resolution applicant to have its
resolution plan approved, and as no adjudication has yet taken place.
80. It is the Committee of Creditors which will approve or disapprove a
resolution plan, given the statutory parameters of Section 30. Under
Regulation 39 of the CIRP Regulations, sub- clause (3) thereof provides:-
(3) The committee shall evaluate the resolution plans received under sub-
regulation
(1) strictly as per the evaluation matrix to identify the best resolution
plan and may approve it with such modifications as it deems fit:
Provided that the committee shall record the reasons for approving or
rejecting a resolution plan. This regulation shows that the disapproval of the
Committee of Creditors on the ground that the resolution plan violates the
provisions of any law, including the ground that a resolution plan is ineligible
under Section 29A, is not final. The Adjudicating Authority, acting quasi-
judicially, can determine whether the resolution plan is violative of the
provisions of any law, including Section 29A of the Code, after hearing
arguments from the resolution applicant as well as the Committee of
Creditors, after which an appeal can be preferred from the decision of the
Adjudicating Authority to the Appellate Authority under Section 61.
81. If, on the other hand, a resolution plan has been approved by the
Committee of Creditors, and has passed muster before the Ad- judicating
Authority, this determination can be challenged before the Appellate
Authority under Section 61, and may further be challenged before the
Supreme Court under Section 62, if there is a question of law arising out of
such order, within the time specified in Section 62. Section 64 also makes it
clear that the timelines that are to be adhered to by the NCLT and NCLAT are
of great importance, and that reasons must be recorded by either the NCLT
or NCLAT if the matter is not disposed of within the time limit specified.
Section 60(5), when it speaks of the NCLT having jurisdiction to entertain or
dispose of any application or proceeding by or against the corporate debtor or
corporate person, does not invest the NCLT with the jurisdiction to interfere
at an applicants behest at a stage before the quasi-judicial determination made
(2021) ABC 83
by the Adjudicating Authority. The non-obstante clause in Section 60(5) is
designed for a different purpose: to ensure that the NCLT alone has
jurisdiction when it comes to applications and proceedings by or against a
corporate debtor covered by the Code, making it clear that no other forum has
jurisdiction to entertain or dispose of such applications or proceedings.
82. One thing that must be made clear at this stage is that when Section 33
speaks of the Adjudicating Authority in sub-section (1), it is referring to both
the Adjudicating Authority as well as the Appellate Authority. An
Adjudicating Authority may decide in favour of a resolution plan, which order
may then be set aside by the Appellate Authority. This order of the Appellate
Authority, setting aside the order of the Adjudicating Authority, would then
be the order which rejects the resolution plan for the purposes of Section 33.
The same would apply to an ultimate order of rejection by the Supreme Court
under Section 62. This is on the principle that, as stated in Lachmeshwar
Prasad Shukul & Ors. v. Keshwar Lal Chaudhuri & Ors. AIR 1941 FC 5 and
followed in a number of our judgments, an appeal is a continuation of the
original proceedings.
83. Given the fact that both the NCLT and NCLAT are to decide matters
arising under the Code as soon as possible, we cannot shut our eyes to the fact
that a large volume of litigation has now to be handled by both the aforesaid
Tribunals. What happens in a case where the NCLT or the NCLAT decide a
matter arising out of Section 31 of the Code beyond the time limit of 180 days
or the extended time limit of 270 days? Actus curiae neminem gravabit - the
act of the Court shall harm no man - is a maxim firmly rooted in our
jurisprudence (see Jang Singh v. Brijlal & Ors. (1964) 2 S.C.R. 146 at page
149, and A.S. Antulay v. R.S. Nayak & Ors. (1988) Supp. 1 S.C.R. 1 at page
71). It is also true that the time taken by a Tribunal should not set at naught
the time limits within which the corporate insolvency resolution process must
take place. However, we cannot forget that the consequence of the chopper
falling is corporate death. The only reasonable construction of the Code is the
balance to be maintained between timely completion of the corporate
insolvency resolution process, and the corporate debtor otherwise being put
into liquidation. We must not forget that the corporate debtor consists of
several employees and workmen whose daily bread is dependent on the
outcome of the corporate insolvency resolution process. If there is a resolution
applicant who can continue to run the corporate debtor as a going concern,
every effort must be made to try and see that this is made possible.3 A
reasonable and balanced construction of this statute would therefore lead to
the result that, where a resolution plan is upheld by the Appellate Authority,
either by way of allowing or dismissing an appeal before it, the period of time
taken in litigation ought to be excluded. This is not to say that the NCLT and
NCLAT will be tardy in decision making. This is only to say that in the event
of the NCLT, or the NCLAT, or this Court taking time to decide an
application beyond the period of 270 days, the time taken in legal proceedings
to decide the matter cannot possibly be excluded, as otherwise a good
resolution plan may have to be shelved, resulting in corporate death, and the
consequent displacement of employees and workers.
84. Coming to the facts of the present case, let us first examine the resolution
plan presented byNumetal. Numetal was incorporated in Mauritius on
13.10.2017, expressly for the purpose Regulation 32 of the Insolvency and
Bankruptcy Board of India (Liquidation Process) Regulations, 2016, states
that the liquidator may also sell the corporate debtor as a going concern. of
submission of a resolution plan qua the corporate debtor, i.e., ESIL. Two
other companies, viz., AHL and AEL, were also incorporated on the same day
in Mauritius. Shri Rewant Ruia, son of Shri Ravi Ruia (who was the promoter
of ESIL) held the entire share capital of AHL, which in turn held the entire
shareholding of AEL, which in turn held the entire share capital of Numetal.
At this stage there can be no doubt whatsoever that Shri Rewant Ruia, being
the son of Shri Ravi Ruia, would be deemed to be a person acting in concert
with the corporate debtor, being covered by Regulation 2(1)(q)(v) of the 2011
Takeover Regulations.
85. On 18.10.2017, AEL transferred its shareholding of 26.1% in Numetal to
a group company, viz., ECL. This group company is ultimately owned by
Virgo Trust and Triton Trust, the beneficiaries of which are companies owned
by Shri Ravi Ruia, his brother Shri Shashikant Ruia and their immediate
family members. The object of including ECL, as stated in the relevant extract
from Numetals expression of interest is as follows:
The Company satisfies the minimum tangible net worth requirement of
INR 30 Billion considering ECL, as a group company that holds 26.1%
(Twenty Six point one Percent) shares in the Company, has net worth of
USD 2,974 million (US Dollars Two Thousand Nine Hundred Seventy
Four million) or INR 192.8 Billion (Rupees One Hundred Ninety Two
Point Eight Billion) as on 31st March 201 (immediately preceding
completed financial year). Please refer Annexure I for the certificate of
Chartered Accountant of the Company certifying satisfaction of the
minimum tangible net worth requirement in terms of the Eligibility
Criteria which includes A, a certificate of Chartered Accountant
certifying ECLs tangible net worth. It is pertinent to note that in case the
company is considered as a consortium potential resolution applicant, it
continues to satisfy the minimum tangible net worth requirement since
the total tangible net worth of the Company, computed on the basis of the
weighted average of AEIs and ECLs net worth proportionate to their
respective shareholding inthe Company, is INR 50.33 Billion, which is in
excess of INR 30 Billion.
86. The very next day, Shri Rewant Ruia settled an irrevocable and
discretionary trust, viz., the Crescent Trust, and settled the entire share capital
of AHL into the Trust, at a par value of USD 10,000. The beneficiaries of this
Trust were general charities, as well as entitles owned by Shri Shashikant
(2021) ABC 85
Ruia (brother of Shri Ravi Ruia, promoter of the corporate debtor), and
entities owned by Shri Rewant Ruia himself.
87. On 20.11.2017, Shri Rewant Ruia settled Prisma Trust, another
irrevocable and discretionary trust, whose beneficiaries are general charities
and one Solis Enterprises Limited, a company incorporated in Bermuda,
whose share capital is held by Shri Rewant Ruia. Numetal, vide a response
dated 30.3.2018, admitted that while the trust deed relating to Prisma Trust
allowed the trustee to benefit any English or Bermuda charity, no particular
charity is named at this stage. The Trustee of AEL is one Rhone Trustee,
Singapore. What is important to note is that Shri Rewant Ruia was the
ultimate natural person who held the beneficial interest in AEL through
Prisma Trust, through Solis Enterprises Limited. This emerges from Section
6.7 of the resolution plan submitted by Numetal to the Resolution
Professional. Interestingly enough, in an affidavit dated 05.03.2018, the
Trustee of Prisma Trust submitted:
that the Trustee (for itself and each person controlled by it), hereby confirm
that AEL or Rewant Ruia neither are nor will, following the implementation
of the Resolution Plan, be a promoter of or have control over or have any
management rights in the RA or ESIL (or the resultant company upon
completion of the Merger) (including without limitation, the rights to appoint
directors on the board of the RA or ESIL, or any specific veto rights or the
right to direct the policy or management of the RA or ESIL in any manner).
88. The Resolution Professional, after looking at this affidavit, correctly
noted that statements of such a nature would not have been made by a truly
independent trustee of a discretionary trust, which demonstrates that the
trustee was under the complete control of Shri Rewant Ruia. This in turn
indicates that Prisma Trust is one more smokescreen in the chain of control,
which would conceal the fact that the actual control over AEL is by none
other than Shri Rewant Ruia himself.
89. Curiouser and Curiouser was the expression of Alice, in Lewis Carrolls
Alice in Wonderland. In this wonderland of Shri Rewant Ruia, one day later
on 22.11.2017, the trustees of the Prisma Trust now acquired 100% of the
shareholding of AHL for a par value of approximately USD 10,000 from the
trustees of the Crescent Trust. On this very date, merely one day before the
Ordinance bringing into force Section 29A was promulgated, ECL transferred
its shareholding of 26.1% of the share capital of Numetal to Crinium Bay, an
indirect wholly owned subsidiary of VTB Bank, whose shares in turn are held
by the Russian Government. AEL also transferred shares representing 13.9%
of the share capital of Numetal to Crinium Bay, thus making Crinium Bays
total holding in Numetal 40%. On the same date, AEL also transferred shares
representing 25.1% of the share capital of Numetal to Indo, and also
transferred shares representing 9.9% of the share capital of Numetal to TPE.
These transfers are likely to have taken place between 10.2.2018 and
12.2.2018. At the time of submission of its first Resolution Plan dated
12.2.2018, the shareholding of Numetal was as follows:
Crinium Bay : 40%
Indo : 25.1%
TPE : 9.9%
AEL : 25%
90. It is important to note that, as of this date, Shri Rewant Ruia, who is the
ultimate beneficiary in the chain of control of the trusts which in turn
controlled AEL, was very much on the scene, holding through AEL 25% of
the shareholding of Numetal.
91. One other extremely important fact needs to be noticed at this stage. The
earnest money in the form of Rs. 500 crores, credited to the account of the
corporate debtor, has been provided to Numetal by AEL as a shareholder of
the resolution applicant, viz. Numetal. It is important to note that this earnest
money deposit of Rs.500 crores made by AEL continues to remain with the
Resolution Professional till date, despite the fact that, by the time the second
resolution plan was submitted by Numetal on 02.04.2018, AEL had exited as
a shareholder of Numetal. It is also important to note that under clause 4.4.4
of the request for proposal for submission of resolution plans for ESIL, the
earnest money deposit stands to be forfeited if any condition thereof is
breached or the qualifications of the potential resolution applicant are found to
be untrue. At this stage, it is important to reproduce relevant extracts of the
resolution plan first submitted by Numetal in response to the request for
proposal. The same are as under:
4. the Resolution Applicant is a newly established company that has been
incorporated to provide a platform to create and sustain a leading Indian
steel business and is focused on the acquisition and turnaround of the
Corporate Debtor.
Accordingly, to implement the Plan, Numetal believes that it has access
to the right mix and balance of the financial and technical market
experience which can be provided to the Corporate Debtor.
Numetal is held by four independent shareholders, who possess
complementary skill-sets in financial, operational, trading and industrial
sectors together with regional expertise that will support the business in
the medium and longer term.
xxx xxx xxx 5.2. (i) Numetal is backed by seasoned and experienced
shareholders who bring deep expertise from different industries covering
Finance, Steel, Oil and Gas, Metal Mining, Trading expertise across
geographies. Crinium Bay Holdings Limited (Crinium Bay) an indirect
wholly owned subsidiary of VTB Bank PJSC (VTB Bank). VTB Bank is
one of the largest emerging market groups listed on Moscow Exchange
(MOEX) and London Stock Exchange (LSE) with current market
capitalization of approximately US$ 12.3bn (approximately INR 79,000
(2021) ABC 87
Crores) and total assets in excess of approximately US$ 220bn
(approximately INR 14,08,000).
xxx xxx xxx VTB Banks support to provide financing, credit assistance
to the Resolution Applicant is set out in Annexure 2 and is subject to the
terms of the letter provided therein.
The other shareholders in Numetal also have material businesses with
international operations focused on the steel, materials and resources
sector-
(a) Tyazhpromexport JSC (TPE) a leading engineering agency in Russia
in ferrous and non ferrous metallurgy project operations and construction
with experience with over 60 years and wholly owned by Russian State
corporation, Rostec;
(b) Indo International Trading FZCO (Indo or IITF), a leading
commodity trading company; and
(c) Aurora Enterprise Trading (sic) Limited (AEL or Aurora) a financial
investor with regional expertise. Numetals (sic) shareholders bring
together a wealth of experience in technical and operational capabilities,
banking and finance, commodity trading and regional expertise for the
benefit of creating long term steel business.
xxx xxx xxx 6.3. The shareholders of Numetal bring to the table,
considerable experience from difference industries covering finance,
steel, oil and gas, metals and mining chemicals and other sectors across
geographies. They have extensive experience in the field of management
of distressed assets/situations, restructuring of debt, turnaround of
corporates and improvement of strategies for cash flows. In addition
these shareholders have a good understanding of Asian markets having
dealt with large corporates in these markets. The above factors coupled
with the financial strength of its shareholders, put Numetal in a strong
position to implement the turnaround successfully. xxx xxx xxx
(c) Aurora Enterprises Limited (AEL) brings a careful focus on financial
returns and expertise of the Indian business and commercial sector to
Numetal. AEL is a pure financial investor.
The beneficiaries of such discretionary trust are general charities and
Solis Enterprise Limited, a company incorporated in Bermuda, the share
capital of which is held by Mr. Rewant Ruia.
Mr. Rewant Ruia is the son of Ravi Ruia, who is one of the existing
promoters of the Corporate Debtor.
92. Clause 6.7 of Numetals resolution plan stipulated that it satisfied the
minimum tangible net worth requirement, as set out under the request for
proposal, because Crinium Bay held 40% of the shareholding of Numetal, and
that VTB Bank, Crinium Bays holding company had sufficient net worth, as
on 31.12.2016, to comply with the requirement under the request for proposal.
The Resolution Professional, in its affidavit before the Adjudicating
Authority, took note of this plan and, therefore, stated:
Under Para 1 of the Eligibility Criteria for Potential Resolution
Applicants published by this Respondent on the website of the Corporate
Debtor, potential resolution applicants were given the option of
satisfying the minimum tangible net worth net owned funds requirement
at a Group Level by taking into consideration the financial of entities
controlling or controlled by or under common control with the potential
resolution applicant. It is evident from the foregoing that Numetal took
advantage of this provision and relied upon the financial wherewithal of
its constituents/shareholders. Numetal has not submitted or relied upon
its stand-alone financials to satisfy the eligibility criteria. It is submitted
that having taken advantage of this provision it is not open to Numetal to
contend that this Respondent cannot look at its constituents/ shareholders
when determining the issue of eligibility under Section 29A of the Code.
Further, it is submitted that even though the RFP document does not
allow a resolution applicant to look at its constituents/ shareholders for
the purposes of demonstrating its experience, it is clear from the
foregoing that Numetal has extensively relied on the experience of its
constituents/shareholders to demonstrate its experience. It is submitted
that having relied on the experience of its constituents/shareholders it is
not open to Numetal to contend that this Respondent cannot look at its
constituents/shareholders when determining the issue of eligibility under
Section 29A of the Code.
93. The excerpted portions of Numetals resolution plan make it clear that,
since Numetal itself was a newly incorporated entity, with no financial or
experience credentials of its own, it therefore relied entirely on the credentials
of each of its constituent shareholders. This shows that Numetal itself
revealed in its resolution plan that its corporate veil should be lifted, for
without lifting this veil, none of the parameters of the request for proposal
could have been met by Numetal itself. It is thus clear that the four
shareholders of Numetal were persons acting jointly within the meaning of
Section 29A. This being the case, it is clear that Shri Salves argument that
VTB Bank is a connected person, being ineligible under sub-clause (j), would
have to be rejected, as VTB Bank is itself, through its wholly owned
subsidiary of Crinium Bay, a person acting jointly with the three other
shareholders of Numetal, and would, therefore, fall within the first part of
Section 29A itself. This being so, it cannot be said that VTB Bank is a person
connected to any one of the persons acting jointly, as it is itself a person
acting jointly, and therefore covered by the first part of Section 29A.
94. It is important to note that on 29.03.2018, AEL transferred its 25%
shareholding in Numetal to the other three constituent shareholders, thereby
leaving its shareholding in Numetal as Nil. In response to the Resolution
Professionals invitation, the second Resolution Plan, therefore, submitted by
(2021) ABC 89
Numetal on 02.04.2018, did not have AEL as a constituent of Numetal;
instead, Crinium Bay continued with 40% of the shareholding of Numetal,
with TPEs holding now augmented to 29.5% and Indos to 34.1%.
95. Given the fact that Shri Rewant Ruia is a person deemed to be acting in
concert with his father Shri Ravi Ruia (who was a promoter of the corporate
debtor ESIL), there is no doubt whatsoever that Section 29A(c) would be
attracted as on the date of submission of the first resolution plan, viz.
12.02.2018, as AEL was held by Prisma Trust, whose ultimate beneficiary is
Shri Rewant Ruia himself. This would show that the NPA declared over a
year before the date of commencement of the corporate resolution process of
ESIL (i.e. in 2015) would render Numetal ineligible to submit a resolution
plan. The only manner in which Numetal could successfully present a
resolution plan would be to first pay off the debts of ESIL, as well as those of
such other corporate debtors of the Ruia group of companies, which were
declared as NPAs prior to the aforesaid period of one year, before submitting
its resolution plan. However, if the date of the second resolution plan is to be
seen, Shri Rewant Ruia appears to have disappeared from the scene
altogether, as the three entities left are stated to be independent entities in the
form of two Russian entities and one UAE entity. Viewed on 02.04.2018,
therefore, could it be said that Shri Rewant Ruia had disappeared from the
scene altogether, so as to obviate the application of Section 29A(c)? The
obvious answer is no. This is for two reasons. First, as has been stated earlier,
the Rs.500 crores that has been deposited towards submission of earnest
money continues to remain deposited by AEL even post 02.04.2018, showing
thereby that Shri Rewant Ruia continues to be present, insofar as Numetals
second resolution plan is concerned. Further, having regard to the reasonably
proximate state of affairs before submission of the resolution plan on
02.04.2018, beginning with Numetals initial corporate structure, and
continuing with the changes made till date, it is evident that, the object of all
the transactions that have taken place after Section 29A came into force on
23.11.2017 is undoubtedly to avoid the application of Section 29A(c),
including its proviso. We therefore hold that, whether the first or second
resolution plan is taken into account, both would clearly be hit by Section
29A(c), as the looming presence of Shri Rewant Ruia has been found all
along, from the date of incorporation of Numetal, till the date of submission
of the second resolution plan.
96. Another argument raised by Shri Salve is that VTB Bank is ineligible to
present a resolution plan, as the major constituent of Numetal, through its
wholly owned subsidiary of Crinium Bay, as VTB Bank is ineligible as sub-
clause (f) read with sub-clause (i) of Section 29A have been attracted.
97. In February/March 2014, the Russian Federation annexed the Ukrainian
region of Crimea. Consequently, on 6.3.2014, the President of the United
States issued Executive Order 13660, pursuant to the International Emergency
Economic Powers Act and the National Emergencies Act. The said order
sought to block the property of Russian entities contributing to the situation in
Ukraine. Summarizing the executive order issued by the President, the
Department of Treasurys Office of Foreign Assets Control commented:-
The Ukraine/Russia-related sanctions program implemented by the Office of
Foreign Assets Control (OFAC) began on March 6, 2014, when the President,
in Executive Order (E.O.) 13660, declared a national emergency to deal with
the threat posed by the actions and policies of certain persons who had
undermined democratic processes and institutions in Ukraine; threatened the
peace, security, stability, sovereignty, and territorial integrity of Ukraine; and
contributed to the misappropriation of Ukraines assets. In further response to
the actions and polices of the Government of the Russian Federation,
including the purported annexation of the Crimea region of Ukraine, the
President issued three subsequent Executive orders that expanded the scope of
the national emergency declared in E.O. 13660. Together, these orders
authorize, among other things, the imposition of sanctions against persons
responsible for or complicit in certain activities with respect to Ukraine;
against officials of the Government of the Russian Federation; against persons
operating in the arms or related materiel sector of the Russian Federation; and
against individuals and entities operating in the Crimea region of Ukraine.
E.O. 13662 also authorizes the imposition of sanctions on certain entities
operating in specified sectors of the Russian Federation economy. Finally,
E.O. 13685 also prohibits the importation or exportation of goods, services, or
technology to or from the Crimea region of Ukraine, as well as new
investment in the Crimea region of Ukraine by a United States person,
wherever located.
98. The Office of Foreign Assets Control thereafter issued Directive Number
1 under Executive Order 13662, stating:-
EXECUTIVE ORDER 13662 Pursuant to Sections 1(a)(i), 1(b), and 8 of
Order with respect to the financial services sector of the Russian
Federation economy, the Director of the Office of Foreign Assets
Control has determined, in consultation with the Department of State,
that the following activities by a U.S. person or within the United States
are prohibited After this, the Office of Foreign Assets Control issued
Directive Number 2, under Executive Order 13662, stating:-
EXECUTIVE ORDER 13662 Pursuant to sections 1(a)(i), 1(b), and 8 of
(2021) ABC 91
Order with respect to the energy sector of the Russian Federation
economy, the Director of the Office of Foreign Assets Control has
determined, in consultation with the Department of State, that the
following activities by a U.S. person or within the United States are
prohibited, except to the extent provided by law or unless licensed or
otherwise authorized by the Office of Foreign Assets Control: (1) For
new debt issued on or after July 16, 2014 and before November 28, 2017,
all transactions in, provision of financing for, and other dealings in new
debt of longer than 90 days maturity of persons determined to be subject
to this Directive or any earlier version thereof, their property, or their
interests in property.
(2) For new debt issued on or after November 28, 2017, all transactions
in, provision of financing for, and other dealings in new debt of longer
than 60 days maturity of persons determined to be subject to this
Directive or any earlier version thereof, their property, or their interests
in property.
All other activities with these persons or involving their property or
interests in property are permitted, provided such activities are not
otherwise prohibited pursuant to Executive Orders 13660, 13661, 13662,
or 13685 or any other sanctions program implemented by the Office of
Foreign Assets Control.
99. The names of persons determined to be subject to the directives issued
under Executive Order 13662 are published in the Sectoral Sanctions
Identification List, published by the Office of Foreign Assets Control. A
perusal of this list shows that VTB Bank is listed therein, along with various
entities affiliated to it.
100. Similarly, under EU Council Regulation 833 of 2014 dated 31.07.2014,
certain restrictive measures in view of Russian actions destabilizing the
situation in Ukraine were taken against certain Russian entities, of which
VTB Bank was one. These measures included:
(5) It is also appropriate to apply restrictions on access to the capital
market for certain financial institutions, excluding Russia-based
institutions with international status established by intergovernmental
agreements with Russia as one of the shareholders.
Other financial services such as deposit business, payment services and
loans to or from the institutions covered by this Regulation, other than
those referred to in Article 5, are not covered by this Regulation. Under
Article I of this regulation, a transferable security was defined as:
(f) transferable securities means those classes of securities which are
negotiable on the capital market, with the exception of instruments of
payment, such as:
(i) shares in companies and other securities equivalent to shares in
companies, partnerships or other entities, and depositary receipts in
respect of shares,
(ii) bonds or other forms of securitised debt, including depositary
receipts in respect of such securities,
(iii) any other securities giving the right to acquire or sell any such
transferable securities or giving rise to a cash settlement; Article V
thereto provided:-
It shall be prohibited to directly or indirectly purchase, sell, provide
brokering or assistance in the issuance of, or otherwise deal with
transferable securities and money-market instruments with a maturity
exceeding 90 days, issued after 1 August 2014 by Further, Annexure III
thereto listed VTB Bank as one of the institutions subject to the
restrictive measures.
101. What has been argued on behalf of Shri Rohatgi is that, in order to be
covered by sub-clause (f) read with sub-clause (i) of Section 29A, the person
must be subject to a disability, which corresponds to a prohibition by SEBI in
India from trading in securities or accessing the securities markets. Sub-
clauses (f) and (i) therefore refer to persons who, on account of their
antecedents, may adversely impact the credibility of the processes under the
Code. This is in fact stated in the Preamble of the Insolvency and Bankruptcy
Code (Amendment) Ordinance, 2017, dated 23.11.2017, which introduced
Section 29A into the Code, as follows:
AND WHEREAS in order to strengthen further the insolvency resolution
process, it has been considered necessary to provide for prohibition of
certain persons from submitting a Resolution Plan who, on account of
their antecedents, may adversely impact the credibility of the processes
under the Code. (Emphasis supplied)
102. What is stressed by Shri Rohatgi is that, in his speech while introducing
the Amendment Bill in Parliament, the Finance Minister stated:-
and a person who is prohibited under SEBI cannot apply. So these are
statutory disqualifications. In the light of this object, Section 29A(i) will
have to be read as a disability which corresponds to Section 29A(f) in
view of the antecedent conduct on the part of the person applying as a
resolution applicant in a jurisdiction outside India.
103. What will be noticed is that the sanctions that have been imposed by the
authorities of both the United States and the Council of the European Union
are not on account of any misconduct on the part of VTB Bank. Rather, they
have been imposed politically, because of the conduct of a particular country,
i.e. Russia, which has sought to undermine Ukraines territorial integrity,
(2021) ABC 93
sovereignty and independence, by illegally annexing Crimea and Sevastopol.
We are of the view that Shri Rohatgi is right, inasmuch as VTB Bank cannot
be said to have been prohibited by an authority outside India from trading in
securities or accessing the securities markets, due to any fraudulent and/or
unfair trade practices relating to the securities market generally. A prohibitory
sanction by an authority situate outside India for political reasons would thus
not be covered by sub-clause (i). However, Shri Salve pointed to an order
dated 19.9.2017 of the US Commodity Futures Trading Commission, which
held:
A. Respondents Violated Section 4c(a)(1) and (2) of the Act
Respondents' RUB/USD block trades constituted unlawful fictitious sales
and caused prices to be reported or recorded that were not true and bona
fide prices. Section 4c(a)(1) and (2) of the Act makes it unlawful "for
any person to offer to enter into, enter into, or confirm the execution of a
transaction that is ... a fictitious sale" or that "is used to cause any price
to be reported, registered, or recorded that is not a true and bona fide
price."
xxx xxx xxx Respondents' RUB/USD block trades were fictitious sales
under the Act. Respondents designed the block trades to accomplish
through the use of the futures market that which was not otherwise
possible for VTB to accomplish in the swaps market. Through the block
trades, VTB was able to transfer its cross-currency risk to VTB Capital
which could then hedge the risk in the swaps market. VTB obtained
pricing from VTB Capital for these transactions that was more favorable
than it admittedly could have obtained from third-parties in the futures
market. With this structure, Respondents, as intended, negated market
risk and avoided price competition. Accordingly, Respondents' block
trades were "fictitious from the standpoint of reality and substance" and
in violation of Section 4c (a) (1) and (2) (A) of the Act. In re Goldwurm,
7 Agric. Dec. 265, 275 (providing that cotton futures trades entered for
purpose of accomplishing income tax reporting goals were "fictitious
from the standpoint of reality and substance"). Further, Respondents'
trades caused prices to be reported to or recorded by the CME that were
not true and bona fide prices in violation of Section 4c(a)(2)(B) of the
Act. See In re Morgan Stanley & Co., [2012 Transfer Binder] Comm.
Fut. L. Rep. (CCH) 32,218 (CFTC June 5, 2012) (settlement order)
(finding violation of Section 4c(a) where unlawfully executed exchanges
for related positions caused non-bona fide prices to be reported or
recorded).
xxx xxx xxx v.
FINDINGS OF VIOLATION Based on the foregoing, the Commission
finds that, during the Relevant Period, VTB and VTB Capital violated
Section 4c(a)(1) and (2) of the Act and Regulation 1.38(a).
104. VTB Bank had submitted an offer before the US Commodity Futures
Trading Commission, in which it, without admitting or denying the findings
or conclusions, had offered to cease and desist from violating the regulations
aforementioned, to pay a civil monetary penalty in the amount of USD five
million, and had ordered its successors and assigns to comply with the
conditions consented to. This offer was accepted by the Commission, and by
way of settlement, apart from what was offered by the respondents, the
respondents further agreed, in the said Order dated 19.9.2017 as follows:-
3. Respondents further agree that they shall comply with the following
additional undertakings:
a. Respondents shall not enter into privately negotiated futures, options
or combination transactions with one another on or through any U.S.-
based futures exchange for a period of two years from the date of this
Order;
105. A reading of this order makes it clear that, even assuming that the
Commodity Futures Trading Commission is an authority which corresponds
with SEBI (Shri Rohatgi has argued that in the United States the Securities
Exchange Commission is the authority which corresponds with SEBI in
India), it is clear that there is no prohibition by the Commodity Futures
Trading Commission of the United States interdicting VTB Bank from trading
in securities or accessing the securities market. All that VTB Bank has done is
consent to a cease and desist order; consent to pay a monetary penalty in the
amount of USD five million; and further consent to not enter into privately
negotiated futures options with a particular subsidiary, viz. VTB Capital, on
or through any US-based futures exchange for a period of two years from the
date of the order. Obviously, a prohibition regarding privately negotiated
futures options, or combination transactions with one another, is not a
prohibition from trading in securities or accessing the securities market. We
thus agree with Shri Rohatgi that Crinium Bay, being a wholly owned
subsidiary of VTB Bank, does not therefore incur any disqualification under
sub-clause (f) read with sub-clause (i) of Section 29A.
106. This brings us to the Appellant, i.e., AMIPL. So far as Uttam Galva is
concerned, the corporate structure is as follows:- AMSA is a listed company
in Luxemburg. This company is the ultimate parent company of the resolution
applicant, through its wholly owned subsidiary AMBD, a company
incorporated in Luxemburg, which in turn holds 100% of the shares in Oakey
Holding BV, a company incorporated in the Netherlands, which in turn holds
99.99% shares in AMIPL, a company incorporated in India. AMNLBV is a
company incorporated in the Netherlands, and is a 100% subsidiary of
AMSA. It is this group company of Shri L.N. Mittal that held 29.05% of the
shareholding in Uttam Galva (as on 07.02.2018).
107. On 04.09.2009, a Co-Promotion Agreement was executed between
AMNLBV and the Indian promoters of Uttam Galva, who are stated to be the
Miglani family, who are residents of Mumbai. As per the Co-Promotion
(2021) ABC 95
Agreement, the foreign promoter, viz., AMNLBV was entitled to nominate
one half of the non-independent directors on the board of Uttam Galva, the
other half being nominated by the Miglanis. Both of them were to jointly
nominate all of the independent directors. Clause 16 of the said agreement,
read with Schedule II thereof, provides a list of matters which require the
affirmative vote of AMNLBV. It is important to notice that the original
shareholding of AMNLBV in Uttam Galva was 32%. This shareholding was
reduced to 29.05% in the hands of AMNLBV, the Miglani group holding
31.82% as of December 2017. The rest of the shares were held by the public.
This Co- Promotion Agreement, therefore, not only names AMNLBV as the
foreign promoter of Uttam Galva, but also makes it clear that Uttam Galva
would be jointly managed and controlled by the foreign and Indian promoters.
Pursuant to this Co-Promotion Agreement, on 07.09.2009 AMNLBV issued a
letter of offer to acquire 35,226,233 fully paid shares of the face value of
Rs.10, representing 25.76% of the share capital of Uttam Galva. In this letter,
it was disclosed to the public at large that AMNLBV was becoming a
promoter of this company, with significant affirmative voting rights. On
20.9.2011, a Non Disposal Undertaking was provided by AMNLBV, as
promoter of Uttam Galva, to the lender banks of Uttam Galva, which included
the State Bank of India. On 31.03.2016, Canara Bank and Punjab National
Bank declared Uttam Galvas accounts as NPA. It is important to note that, in
all the annual returns of Uttam Galva till date, AMNLBVs shareholding has
been shown as promoters shareholding. All the annual reports, upto 2017,
contained a list of promoters, which included AMNLBV as one such, holding
29.05%% of the share capital of the company, and having significant
influence over the company. Shri Salves argument that, in point of fact, no
control was actually exercised as AMNLBV never appointed any directors or
exercised its voting rights, cannot be accepted as that makes no difference to
the de jure position of AMNLBV being a promoter as defined in Section
2(69)(a) of the Companies Act, 2013.
108. On 7.2.2018, a few days before AMIPL submitted its first resolution
plan, AMNLBV sold its entire shareholding in Uttam Galva by way of an off
market sale, to a company of the Indian copromoters, viz., Sainath Trading
Company Private Limited. Shares that were purchased for Rs.120 each, were
sold for Re.1 each, when the market value of the shares on the said date was
admittedly Rs.19.50 per share. The aforesaid sale of shares was done without
making an open offer under the 2011 Takeover Regulations, on the basis that
it was an inter se transfer of shares between promoters, and therefore exempt
from such requirement under Regulation 10 of the said regulations. Also, as a
matter of fact, the sale of the said shares was effected without taking the
consent of the lenders of Uttam Galva, which consent was necessary as per
the Non Disclosure Undertaking that was executed by AMNLBV. On
07.02.2018, consequent to the aforesaid inter se transfer, the Co-Promotion
Agreement is said to have stood automatically terminated. By way of
abundant caution, a formal deed of termination was entered into. AMNLBV
addressed letters to the NSE and the BSE to record the aforesaid inter se
transfer, who accordingly declassified AMNLBV as a promoter of Uttam
Galva on 21.03.2018 and 23.03.2018 respectively.
109. It is absolutely clear that Shri L.N. Mittal, who is the ultimate
shareholder of the resolution pplicant, viz. AMIPL, is directly the ultimate
shareholder of AMNLBV as well, which is an L.N. Mittal Group Company.
When the corporate veil of the various companies aforementioned is pierced,
both AMIPL and AMNLBV are found to be managed and controlled by Shri
L.N. Mittal, and are therefore persons deemed to be acting in concert as per
Regulation 2(1)(q)(2)(i) of the 2011 Takeover Regulations. That AMNLBV is
a promoter of Uttam Galva is clear from the aforementioned facts, being
expressly stated as such in Uttam Galvas annual returns. The reasonably
proximate facts prior to the submission of both resolution plans by AMIPL
would show that there is no doubt whatsoever that AMNLBVs shares in
Uttam Galva were sold only in order to get out of the ineligibility mentioned
by Section 29A(c), and consequently the proviso thereto. The fact that the
lenders with whom AMNLBV had a Non Disposal Undertaking have not yet
moved any forum for a declaration that the sale of the shares, being without
their consent, is non est, does not absolve AMNLBV from having failed to
first obtain their consent before selling off its shares in Uttam Galva. Such
sale is directly contrary to the Non Disposal Undertaking given to the lenders.
Quite apart from this, it is also clear that shares worth Rs.19.50 each were
sold at a distress value of Re.1 each, so as to overcome the provisions of
Section 29A(c) and the proviso thereto. It is clear therefore that the Uttam
Galva transaction clearly renders AMIPL ineligible under Section 29A(c) of
the Code.
110. Insofar as the transaction with regard to KSS Petron is concerned, the
facts are as follows:- on 03.03.2011, Fraseli, an entity registered and
incorporated in Luxemburg, which is managed and controlled by Shri L.N.
Mittal, held 32.22% of the shareholding of KSS Global, a company domiciled
in the Netherlands. On 19.5.2011, by a Shareholders Agreement entered into
between KSS Holding, KSS Infra EALQ, Fraseli and KSS Global, the first
three companies were each given a right to appoint an equal number of
directors on the board of directors of KSS Global, which in turn held 100% of
the share capital of KSS Petron, a company incorporated in India. Fraseli was
also granted affirmative voting rights on decisions regarding certain specified
matters, both at the board and the shareholder level, in respect of KSS Global
and all companies controlled by it, which would include KSS Petron. As has
been stated hereinabove, KSS Petron was declared as an NPA on 30.09.2015.
As in the case of Uttam Galva, Fraseli divested its shareholding in KSS
Petron on 9.02.2018, i.e., only three days before AMIPL submitted its first
resolution plan. On the same day, the directors nominated by Shri L.N. Mittal,
through Fraseli, resigned from the board of KSS Global.
(2021) ABC 97
111. From the aforementioned facts, there can be no doubt whatsoever that
Fraseli, being a company managed and controlled by Shri L.N. Mittal, holding
one third of the shares in KSS Global, which in turn held 100% of the share
capital in KSS Petron, was in joint control of KSS Petron, if the corporate veil
of all these companies is disregarded. Further, the Shareholders Agreement of
19.5.2011 makes it clear that the joint control of KSS Global would be
between three entities, viz., KSS Holding, KSS Infra EALQ and Fraseli, each
of whom had the right to appoint an equal number of directors on the board of
directors of KSS Global. Not only this, but Fraseli was also granted
affirmative voting rights as aforementioned, on certain important specified
matters. There would be no doubt whatsoever that, just before presentation of
the resolution plan of 12.02.2018, AMIPL wouldbe hit by Section 29A(c), as
a group company of Shri L.N. Mittal exercised positive control, by its
shareholding, right to appoint directors and affirmative voting rights, over
KSS Global, which in turn held 100% shareholding in KSS Petron. Again, as
in the case of Uttam Galva, there can be no doubt whatsoever that the sale of
Fraselis shareholding in KSS Global, together with the resignation of the
Mittal directors from the board of directors of KSS Global, is a transaction
reasonably proximate to the date of submission of the resolution plan by
AMIPL, undertaken with the sole object of avoiding the consequence
mentioned in the proviso to Section 29A(c). Having regard to the law laid
down by us in this judgment, it is, therefore, clear that AMIPL is ineligible
under Section 29A(c) of the Code, on this account as well.
112. Shri Rohatgi also argued before us that Shri Pramod Mittal, brother of
Shri Laxmi Mittal, also held shares in two other companies which were
declared to be NPAs more than one year prior to the date of commencement
of the corporate insolvency resolution process of ESIL. We have been
informed by Shri Salve that Shri Pramod Mittal parted company with Shri
L.N. Mittal as far back as 1994, and cannot therefore be regarded as a person
acting in concert with Shri L.N. Mittal. Since this aspect of the case has not
been argued before the authorities below, though raised in an I.A. by Numetal
before the Appellate Authority, we will not countenance such an argument for
the first time before this Court.
113. Since it is clear that both sets of resolution plans that were submitted to
the Resolution Professional, even on 2.4.2018, are hit by Section 29A(c), and
since the proviso to Section 29A(c) will not apply as the corporate debtors
related to AMIPL and Numetal have not paid off their respective NPAs,
ordinarily, these appeals would have been disposed of by merely declaring
both resolution applicants to be ineligible under Section 29A(c). Shri
Subramanium, on behalf of the Committee of Creditors, requested us to give
one more opportunity to the parties before us to pay off their corporate
debtors respective debts in accordance with Section 29A, as the best
resolution plan can then be selected by the requisite majority of the
Committee of Creditors, so that all dues could be cleared as soon as possible.
Acceding to this request, in order to do complete justice under Article 142 of
the Constitution of India, and also for the reason that the law on Section 29A
has been laid down for the first time by this judgment, we give one more
opportunity to both resolution applicants to pay off the NPAs of their related
corporate debtors within a period of two weeks from the date of receipt of this
judgment, in accordance with the proviso to Section 29A(c). If such payments
aremade within the aforesaid period, both resolution applicants can resubmit
their resolution plans dated 02.04.2018 to the Committee of Creditors, who
are then given a period of 8 weeks from this date, to accept, by the requisite
majority, the best amongst the plans submitted, including the resolution plan
submitted by Vedanta. We make it clear that in the event that no plan is found
worthy of acceptance by the requisite majority of the Committee of Creditors,
the corporate debtor, i.e. ESIL, shall go into liquidation. The appeals are
disposed of, accordingly.
_____________
(2018) 5 ITJ Online 685 (Bom.)
In the High Court of Bombay
Trustees of Kilachand Devchand Foundation
v.
Commissioner of Income Tax
Shri S.P. Bharucha and Shri T.D. Sugla, JJ.
ITR No. 430 of 1975
26th March, 1987
Donations-S.12(2) of the Income Tax Act, 1961-Reference-S.256 of Income

Tax Act,1961-Against Voluntary Contribution under the Head of Capital
Account-Held-The tax to surplus is unwarranted from voluntary contribution
not to be held as Income for purpose of taxation, donations not to be held as
Income in the hands of the Assessee.
Final outcome – In favour of Assessee

Relevant Provisions : S.12(2) of Income tax Act,1961
Relevant Period: A.Y. 1967-68
CIT v. Bal Utkarsh Society, (1979) 119 ITR 137(Ker.) [Refer Para 5]
CIT v. Eternal Science of Man's Society, (1981) 128 ITR 456 (Del.) [Refer
Para 5]
CIT v. Vanchi Trust, (1981) 127 ITR 227(Ker.) [Refer Para 5]
R.B. Shreeram Religious & Charitable Trust v. CIT, (1998) 233 ITR 53 (SC)
[Refer Para 6]
Sri Dwarkadheesh Charitable Trust v. ITO, (1975) 98 ITR 657(All.)[Refer
(2021) ABC 99
Para 5]
Counsel :
– Dilip Dwarkadas and S.H. Paralkar, for the Appellant;
– G.S. Jetley and Dinesh H. Parekh, for the Respondent.
Eqvivalent Citations : (1987) 32 Taxman 393 (Bombay) : (1988) 172
ITR 382 (Bombay) : (1987) 63 CTR 104 (Bombay)
JUDGMENT
Shri Bharucha, J. :
1. This reference under Section 256(1) of the Income Tax Act, 1961 ('the
Act') is made at the instance of the revenue. It raises the following question:
“Whether, on the facts and in the circumstances of the case, the sums of
Rs. 2,50,000/- and Rs. 40,000/- received by the assessee-trust from the
donors, Dharma Vijay Agency and Kilachand Devchand Charity Trust,
as voluntary contributions on capital account constituted 'income' under
the Income Tax Act, 1961?”
Involved in the reference is the Assessment Year 1967-68, the previous year
for which ended on 31.12.1966. The assessee is a society registered under the
Societies Registration Act, 1860. It has charitable objects. On 11.11.1965 a
public charitable trust called the Kilachand Devchand Charity Trust made an
offer of a capital donation of Rs. 40,000/- to the assessee, which offer was
accepted. On 07.12.1965 a public charitable trust called Dharma Vijay
Agency made an offer of a capital donation of Rs. 2,50,000/- to the assessee,
which offer was also accepted. Pursuant to the condition of the offers, the
donations were added to the assessee's capital.
2. In the assessment of the assessee for the year in question, the ITO called
upon the assessee to explain the surplus, i.e., the excess of the permissible
limit of accumulation of income prescribed by Section 11(1) of the Act. He
did not accept the assessee's contention that the said donations fell outside the
provisions of Section 12(2) of the Act and brought to tax the surplus. The
assessee appealed. The AAC held that the ITO had erred in taxing the said
donations, aggregating to Rs. 2,90,000/-, as deemed income in the assessee's
hands. The revenue appealed from the AAC's order to the Tribunal. The
appeal was allowed. The question that is posed to us arises out of the
Tribunal's order.
3. The answer to be given to the question depends upon the interpretation of
sub-sections (1) and (2) of Section 12 which read thus:
“12. Income of trusts or institutions from voluntary contributions.–(1)
Any income of a trust for charitable or religious purposes or of a
charitable or religious institution derived from voluntary contributions
and applicable solely to charitable or religious purposes shall not be
included in the total income of the trustees or the institution, as the case
may be.
(2) Notwithstanding anything contained in sub-section (1), where any
such contributions as are referred to in sub-section (1) are made to a trust
or a charitable or religious institution by a trust or a charitable or
religious institution to which the provisions of section 11 apply, such
contributions shall, in the hands of the trust or institution receiving the
contributions, be deemed to be income derived from property for the
purposes of that section and the provisions of that section shall apply
accordingly.”
The provisions of sub-section (2) of Section 12 apply to 'such
contributions as are referred to in sub-section (1)' thereof. Sub-section (1)
refers to contributions which are 'voluntary contributions and applicable
solely to charitable or religious purposes'. Donations of a capital nature
may be voluntary. They cannot, however, be applied to charitable or
religious purposes. It is the income thereof that must be so applied. A
contribution made expressly to the capital or corpus of a trust, though
voluntary, does not, therefore, fall within the purview of sub-section (2)
of Section 12.
Accordingly, such contribution cannot be deemed to be income derived
from property for the purposes of Section 11 and the provisions of
Section 11 will not apply.
4. Mr. Jetley, the Learned Counsel for the revenue, submitted that the
contributions referred to in sub-section (2) of Section 12 will be deemed to be
income derived from property for the purposes of section 11 and all
conditions for exemption under section 11 will apply. Sub-section (2) of
Section 12 refers to contributions in sub-section (1) thereof. In the instant
case, the provisions of Section 11 had not been complied with and the
Tribunal was right in the view that it took.
5. Mr. Jetley's submission begs the question. The question is: What are
'such contributions as are referred to in sub-section (1)'. Those are, as we have
stated, 'voluntary contributions and applicable solely to charitable or religious
purposes'.
In the view that we take, the Tribunal was in error in holding that the
aggregate sum of Rs. 2,90,000/- constituted income in the hands of the
assessee.
We are supported in the construction that we have placed upon sub-section (2)
of Section 12 by the judgments of the Gujarat and the Kerala High Courts
in CIT v. Bal Utkarsh Society, (1979) 119 ITR 137(Ker.) and in CIT v. Vanchi
Trust, (1981) 127 ITR 227(Ker.).
The same conclusion has been arrived at, though upon a different construction
of the provisions of sub-section (2) of Section 12 by the Allahabad High
Court in Sri Dwarkadheesh Charitable Trust v. ITO, (1975) 98 ITR 657(All.),
and the Delhi High Court in CIT v. Eternal Science of Man's Society, (1981)
128 ITR 456 (Del.) .
(2021) ABC 101
6. Mr. Dwarkadas, the Learned Counsel for the assessee, pointed out that it
had been urged before the Tribunal on behalf of the assessee that Section
12(1) applied only to the income derived from contributions and not to the
contributions themselves. He did not press the contention before us because of
the judgment of this Court delivered at Nagpur on 20.01.1987 in R.B.
Shreeram Religious & Charitable Trust v. CIT, (1998) 233 ITR 53 (SC) [IT
Reference No. 428 of 1975, dated 20.01.1987]. The Bench (of which one of
us was a member) found the submission that Section 12(1) referred only to the
income derived from voluntary contributions and not to the voluntary
contributions themselves unacceptable.
7. Mr. Dwarkadas submitted that the amendment effected in 1972 to
Section 12 and Section 2(24) clarified the position in regard to which
contributions constituted income. Having regard to our construction of the
provisions of Section 12, it is unnecessary to go into this submission, as also
the submission that the said donations were casual and not of a recurring
nature and, therefore, exempt.
8. In the result, the question is answered in the negative and in favour of the
assessee. No order as to costs.
_____________
(2018) 5 ITJ Online 677 (Karnataka)
In the High Court of Karnataka
Director of Income Tax, Banglore
v.
Sri Ramakrishna Seva Ashrama
Shri N. Kumar and Shri Ravi Malimath, JJ.
IT Appeal No. 248 of 2010
17th October, 2011
Deductions over Donations-S.80G of Income Tax Act,1961-Appeal Prefered
by the Revenue-DIT (E) rejected application of Assessee for recognition
Under Section 80G of Income Tax Act,1961-tribunal set aside the order of
DIT (E) and directed him to pass an order giving recognition to the assessee
for the purpose of Section 80-G of the Act-Appeal preffered under these
circumstances-Held-the assessee has filed returns. In the returns, he has
specifically mentioned that these contributions are received for the aforesaid
purpose and claimed exemptions. Assessing Authority being satisfied with the
requirements of Section 11(1) (b) is being fully complied with, has accepted
the same and granted exemption under the aforesaid provision. It is too late in
the day for the Commissioner for Directorate of Income Tax (exemptions) to
ignore all these undisputed facts which are available in the record and to
refuse to renew the registration, if is unfortunate that the higher authority has
not applied its mind in proper perspective to these provisions. The parliament
intended to pass on the benefit of exemption of payment of income tax to the
charitable and religious institutions. We are really surprised at the attitudes of

these authorities who are over-technical in denying the benefit to the
deserving institutions, which are rendering laudable services to the rural
masses. By not granting tax exemptions, which they deserve, the authorities
have hampered the said social activities of the trust and they are made to
waste their precious time, energy and money in fighting this litigation. We do
not appreciate this attitude on the part of the authorities in denying the benefit
which the parliament has given to such persons. Therefore, the Tribunal was
fully justified in interfering with such an illegal order and granted the relief to
the assessee for which it is entitled to. Unfortunately, the persons who took a
decision to file an appeal, before this Court are wasting the precious time of
the trust which could have been used in the social service. Public money and
the time of this Court is also wasted. This attitude on the part of the
department cannot be countenanced
Final outcome – Appeal Dismissed

Relevant Provisions : S.80 G & S.11 of Income Tax Act,1961
Relevant Period: N/A.
Sukhdeo Charity Estate v. ITO, (1991) 192 ITR 615 (Raj.) [Refer Para 15]
Trustees of Kilachand Devchand Foundation v. CIT, (1988) 172 ITR 382 :
(1987) 32 Taxman 393 [Refer Para 14]
Counsel :
– K.V. Aravind and M.V. Seshachala, for the Appellant;
– S. Parthasarathi, for the Respondent.
Eqvivalent Citations: (2012) 205 Taxman 26 (Karnataka) : (2013) 357
ITR 731 (Karnataka) : (2013) 258 CTR 201 (Karnataka)
JUDGMENT
Shri N. Kumar, J. :
1. The revenue has preferred this appeal challenging the order dated
16.02.2010 passed by the Tribunal in ITA No.937/Bang./2009 setting aside
the order of the Director of Income Tax (Exemptions), who had rejected the
application of the assessee for approval under Section 80-G of the Income
Tax Act (for short I.T. Act.) and directed him to pass an order giving
recognition to the assessee for the purpose of Section 80-G of the Act.
2. The assessee Sri Ramkrishna Seva Ashrama, Pavagada, came into
existence by way of trust deed dated 08.10.1990. It was granted registration
under Section 12(A) of the I.T. Act on 24.05.1991. The assessee was also
given the benefit of Section 80-G of the I.T. Act, 1961. The assessee has been
making an application for its renewal regularly and it was renewed from time
(2021) ABC 103
to time. On 02.02.2009 the assessee filed an application in Form No.10-G
seeking for renewal of the recognition under Section 80-G of the I.T. Act for
the relevant assessment years. The authority on receipt of the said applications
noticed certain deficiencies and by letter dated 06.03.2009 called upon them
to furnish particulars mentioned in the said letter. On receipt of the same, the
assessee furnished the details called for on 23.09.2009. Further clarification
sought for was also furnished by the assessee. In the statement of accounts for
the past three years, i.e., 31.03.2006, 31.03,2007 and 31.03.2008, the assessee
computed the income under Section 11(1). The capitalised receipts of Rs.
13.86.199/-, Rs. 1.11.37,611/- and Rs. 19,33,268/- for the financial year 2005-
06, 2006-07 and 2007-08 respective as Rural Project fund. The assess was
asked to explain the nature and purpose of the said fund and also as to why
the said amount is not considered for computation of 85% application under
Section 11(1) of the I.T. Act for the respective years. The assessee replied by
a letter dated 22.07.2009 contending that the area of operation of the assessee-
trust is in a remote place of the border of Karnataka-Andhra Pradesh rural
area. Several organisations have been giving specific donations for Rural
Project Fund. This being a specific donation, the same is credited to Rural
Project Fund pending till utilisation of the above funds and therefore, the
assessee contended that the question of applying 85% of the income so
derived to charitable or religious purposes and eligibility for claiming
exemption would not arise. The Commissioner for Director of Income Tax
Department did not accept the said contention. He was of the view that the
donations to so-called rural project fund are not corpus donations, as such, the
same is not credited to corpus account. No details of the donors are furnished,
in spite of the specific directions. All donations except, corpus donations
referred to in Section 11 (1) (d) would constitute income irrespective of use of
the same for different purposes. There is no distinction between the specific
and non-specific fund in law. The assessee has not clarified the project for
which the fund is intended to be used, except calling it as specific fund and no
specific purpose is mentioned. The assessee has accumulated Rs.
1,47,64,078/- for a period of more than four years. During these years, no
expenditure was incurred for so-called rural project. The assessee has not
applied 85% of this income for charitable purposes, as intended to be under
Section 11(2) of the Act. Unless the authority is satisfied, registration or
renewal is not permissible. Therefore, he refused to grant approval under
Section 80-G(5) of the Act. Aggrieved by the said order, the assessee
preferred an appeal to the Tribunal.
3. The Tribunal held, the Director of Income Tax made a mistake in
computing quantum of 85% of the income of the assessee. The assessee
collected the amounts by way of donations directly towards funds, known as
Rural Project Fund. It is a capital fund formulated by the assessee and
earmarked for specific rural projects. Therefore, all donations collected under
that head were in the nature of corpus donations and such corpus donations do
not form part of the income of a charitable trust. Therefore, non-spending of
85% of such capital fund cannot be said to be non-spending of 85% of the
income of the trust. In other words, the funds collected under the capital
account cannot be equated to the income of the assessee-trust. But, the
Director of Income Tax Department has treated such corpus donations as
expendable income of the trust. He was wrong in that regard by excluding the
same from the expandable income of the assessee. He erred in not treating
donations of the rural project fund as corpus donations only, for the reason
that the capital fund has been designated as special fund in the name of Rural
Project Fund. It does not cease to be the capital fund. After examining the
details of the activities carried on by the trust, they were satisfied that the
assessee is carrying on expandable charitable works in rural areas especially
in the field of medical care, namely eradication of leprosy. By virtue of the
charitable activities carried on, it is entitled for the benefit of Section 11(1) as
well. Therefore, they set aside the order of the Director of Income Tax
(Exemptions) and directed him to pass an order making recognition to the
assessee for the purpose of Section 80-G of the Act. Aggrieved by the said
order, the revenue is in appeal.
4. Learned Counsel for the revenue assailing the impugned order contended
that, for the said amount to constitute corpus fund, the required law is that the
said contribution has to be made with specific direction that it shall form part
of the corpus of the trust. In the instant case, except in the case of two
donations, in spite of request from the department, the assessee has not
furnished the name of other donors. Therefore, there is nothing on record to
show that the other donors made the contribution with specific direction. Then
only it shall form part of the corpus fund. Secondly, he contended that, it was
not collected as corpus fund, but it was collected under the head of Rural
Project Fund and in the statement of accounts filed, the assessee reflected it
under the aforesaid head. Therefore, it does not constitute a part of the corpus
fund. Thirdly, he contended that to be eligible to claim exemption under
Section 11(2)(a) of the I.T. Act, 85% of the aforesaid income has to be
utilised for charitable purposes. If for any reason, that amount is not used for
the said purpose, then it is the requirement of law that they should file an
application under Section 11(2) in Form No. 10 furnishing the particulars
mentioned therein, Admittedly, if 85% of the amount collected as rural fund is
not spent, then no such declaration in Form No. 10 is filed and therefore, in
either event the assessee is not entitled to the benefit of exemption and
therefore, he submits that the assessee is not entitled to the said benefit.
5. Per contra, the Learned Counsel appearing for the assessee has
supported the impugned order.
6. In the light of the above facts and submissions, the following substantial
question of law arises for our consideration:
“If the assesses receives contributions for charitable purposes and do not
show in the statement of account as the 'corpus fund', but, shows the said
(2021) ABC 105
amount under a different specific head, does it cease to be a corpus fund
to be eligible for the benefit under Section 11(1)(d) of the Act.”
7. Section 2(24) of the Income Tax Act defines 'income'.
(24) “Income includes–
(i) profits and gains;
(ii) dividend;
(iia) voluntary contributions received by a trust created wholly or partly
for charitable or religious purposes or by an institution established
wholly or partly for such purposes or by an association or institution
referred to in Clause (21) or Clause (23), or by a fund or trust or
institution referred to in sub-clause (iv) or sub-clause (v) or by any
university or other educational institution referred to in sub-clause (iiiad)
or sub-clause (vi) or by any hospital or other institution referred to in
sub-clause (iiiae) or sub-clause (via) of Clause (23C) of Section 10
Explanation - For the purposes of this sub-clause, trust" includes any
other legal obligation:
(iii) the value of any perquisite or profit in lieu of salary taxable under
Clauses (2) and (3) of Section 17;
(iiia) any special allowance or benefit, other than perquisite included
under sub-clause (iii), specifically granted to the assessee to meet
expenses wholly, necessarily and exclusively for the performance of the
duties of an office or employment of profit;
(iiib) any allowance granted to the assessee either to meet his personal
expenses at the place where the duties of his office or employment of
profit are ordinarily performed by him or at a place where he ordinarily
performed by him or at a place where he ordinarily resides or to
compensate him for the increased cost of living;
(iv) the value of any benefit or perquisite, whether convertible into
money or not, obtained from a company either by a director or by a
person who has a substantial interest in the company, or by a relative of
the director or such person, and any sum paid by any such company in
respect of any obligation which, but for such payment, would have been
payable by the director or other person aforesaid;
(iva) the value of any benefit or perquisite. whether convertible into
money or not, obtained by any representative assessee mentioned in
clause (iii) or clause (iv) of sub-section (1) of Section 160 or by any
person on whose behalf or for whose benefit any income is receivable by
the representative assessee (such person being hereafter in this sub-
clause referred to as the “beneficiary”) and any sum paid by the
representative assessee in respect of any obligation which, but for such
payment, would have been payable by the beneficiary;
(v) any sum chargeable to Income Tax under clause (ii) and (iii) of
Section 28 or Section 41 or Section 59;
(va) any sum chargeable to Income Tax under clause (iiia) of Section 28;
(vb) any sum chargeable to Income Tax under clause (iiib) of Section 28;
(vc) any sum chargeable to Income Tax under clause (iiic) of Section 28;
(vd) the value of any benefit or perquisite taxable under clause (iv) of
Section 28;
(ve) any sum chargeable to Income Tax under clause (v) of Section 28;
(vi) any capital gains chargeable under Section 45;
(vii) the profits and gains of any business of insurance carried on by a
mutual insurance company or by a co-operative society, computed in
accordance with Section 44 or any surplus taken to be such profits and
gains by virtue of provisions contained in the first Schedule:
8. From the aforesaid definition clauses it is clear that the voluntary
contribution received by a trust and credited wholly or partly for charitable or
religious purposes or by the institution established wholly or partly for the
said purposes would constitute income within the aforesaid definition.
9. Section 11 deals with income from property held for charitable or
religious purposes. It declares that subject to the provisions of Sections 60 to
63, the income tax mentioned in the aforesaid provision shall not be included
in the total income of the previous year of the person, in respect of the
income. In other words, if such income do not fall in one of those categories
mentioned in the said section, the recipient of the said income (assessee) is
liable to pay tax under the Act.
10. Section 11(1)(d) reads as under:
“Income in the form of voluntary contributions made with a specific
direction that they shall form part of the corpus of the trust or
institution.”
11. The word 'corpus' is not defined under the Act. We do not find any
judgment explaining the meaning of 'corpus'. In the Chambers 21st Century
Dictionary, the meaning of the word 'corpus' has been given as under:
(i) body of writings, eg: by a particular author, on a particular topic, etc.;
(ii) a body of written and/or spoken material for language research;
(iii) anatomy any distinct mass of body tissue that may be distinguished from
its surroundings.
Latin: meaning- 'body'.
12. In the Law Lexicon of P. Ramanatha Aiyar, 2nd Edition reprint-208 the
meaning of the word 'Corpus' is given as under:
“A Body; human body; an artificial body created by law; as a corporation; a
body or collection of laws; a material substance; something visible and
tangible; as the subject of a right; something having legal position as
(2021) ABC 107
distinguished from an incorporeal physical substance as distinguished from
intellectual conception; the body of estate; or a capital of on estate”.
13. The word 'Corpus' is used in the context of Income Tax Act. We have to
understand the same in the context of a capital, opposed to an expenditure. It
is a capital of an assessee; a capital of an estate; capital of a trust; a capital of
an institution. Therefore, if any voluntary contribution is made with a specific
direction, then it shall be treated as the capital of the trust for carrying on its
charitable or religious activities. Then such an income falls under Section
11(d) of the I.T. Act and is not liable to tax. Therefore, it is not necessary that
a voluntary contribution should be made with a specific direction to treat it as
'corpus', If the intention of the donor is to give that money to a trust which
they will keep it in trust account in deposit and the income from the same is
utilised for carrying on a particular activity, it satisfies the definition part, of
the corpus. The assessee would be entitled to the benefit of exemptions from
payment of tax levied.
14. In fact the Bombay High Court in the case of Trustees of Kilachand
Devchand Foundation v. CIT, (1988) 172 ITR 382 : (1987) 32 Taxman 393
dealing with the said voluntary contribution made for a charitable purpose,
held that for being eligible for exemption, the donations must be voluntary
and of a capital nature. That cannot be applied to charitable or religious
purposes if the income thereof they must be so applied. The contribution
made expressly to the capital or corpus of trust fall within the purview of sub-
section (2) of Section 12. Therefore, such contributions cannot be be deemed
to be the income derived from the property for the purpose of Section 11 of
the said Act and provisions of Section 11 will not apply.
15. The Rajasthan High Court in the ease of Sukhdeo Charity
Estate v. ITO, (1991) 192 ITR 615 (Raj.) dealing with such contributions held
that, the principles enunciated in various cases when applied to the present
case, leave no room for debate that the intention of the donor-trust as well as
donee-trust was to treat the money as capital to be spent for Ladnu Water
Supply Scheme. It is of no consequence whether the amount had since been
paid to the State Government or kept in the account of the above-referred
scheme by the assessee-trust. From whatever angle it may be seen, the
deposited amount cannot be said to be income in the hands of the recipient-
trust. Therefore, what ultimately reveals that,-(i) the intention of the donor
and (ii) how the recipient-assessee treat the said income. If the intention of the
donor is that the amount/donation given is to be treated as capital and the
income from that capital has to be utilised for the charitable purposes, then the
said voluntary contribution is towards the part of the corpus of the trust.
Similarly, the assessee after receiving the amount, keeps the amount in
deposit and only utilise the income from the deposit to carry out the charitable
activities, then also the said amount would be a contribution to the corpus of
the trust and the nomenclature in which the amount is kept in deposit is of no
relevance as long as the contribution received are kept in deposit as capital
and only the income from the said capital which is to be utilised for carrying
on charitable and religions activities of the institute/corpus of the trust, for
which Section 11(i)(d) of the Act is attracted and the said income is not liable
for tax tinder the Act.
16. In this background, we look at the facts of the case. It is not in dispute
that the assessee is registered by the income tax authorities as a person
carrying on charitable and religious activities under Section 12-A of the Act.
While receiving these donations, the assessee has complied with all the
requirements mentioned in law and imposed by the authorities at the time of
granting exemptions. They have also been granted the benefit of registration
under Section 80-G of the Act only after looking into the balance sheet that
the amounts collected by them for a period of three years was under the head
of Rural Project Fund. When 85% of the said amount has not been utilised for
the charitable purposes, they have declined to grant registration on the ground
that they have not complied with the conditions under Section 11(2)(a) of the
Act. They have denied the benefit under Section 11(1)(d) of the Act on the
assumption that the amount so collected is not towards the corpus of the trust.
It is not in dispute that they have collected the amount for three years by way
of voluntary contributions. The assessee is a charitable and religious trust. The
documents furnished by them to the department, particularly, a report
regarding Swamy Vivekananda Integrated Rural Health Center and Shree
Sharadadevi Eye Hospital and Research Center (Units of Sri Ramakrishna
Sevashrama), it is clear that the said center was started in the year 1992 with
due registration and it has been working since then for the welfare of the
needy people and the first project of it is Leprosy Eradication Project.
Likewise, they have set out 14 projects, which are started in the rural areas
and in particular in the border districts of Karnataka -Andhra Pradesh. The
further particulars given in the report shows that the main unit of the hospital
at Pavagada is having T.B. and Leprosy Hospital consisting of 30 beds for
inpatients, a fully equipped operation theatre, X-Ray Unit, ECG,
Physiotherapy, Laboratory and there is also Ambulance facility and the
patients who approaches for treatment and if admitted as in-patients, are also
provided food through Annapoorna Nilaya situate at the main unit. The above
center also consists Integrated Counselling and Testing Center (ICTC),
Disability Prevention and Medical Rehabilitation (DPMR), Arogya Raksha
Yojana, Eye Hospital, Primary Health Centres. Therefore, one of the activities
of the trust is to treat T.B. and leprosy patients and for that purpose, they have
a project called Leprosy Eradication Project and the said project is confined to
the rural areas in Pavagada, the border districts of Karnataka-Andhra Pradesh.
They received voluntary contributions from philanthropers and they have
accumulated the said amount under the head of Rural Health Project. All the
contributions received are kept in fixed deposit. In other words, no portion of
the contribution received is utilised for this project. It shows the intention of
the assessee is to treat these contributions as corpus and the income derived
from the corpus is used for carrying on the said activities.
(2021) ABC 109
17. Insofar as the argument that the persons who made these contributions
does not specifically direct that they shall form part of the corpus of the trust
is concerned, it has no substance. In view of the language employed in Clause
(b) of sub-section (a) of Section 11, the requirement is that the voluntary
contributions have to be made with a specific direction. The law does not
require that the said direction should be in writing. In the absence of the
direction in writing, the only way that one can find out whether there was a
specific direction and to find out how the money so paid it is utilized. if the
money so received by way of voluntary contributions, it is meant to use for
the Leprosy patients and is credited to a particular account and from the
income from the said capital, the said activity is carried on the requirement of
Clause (b) of sub-section (1) of Section 11 is complied with. In the instant
case, on record, we see that those people who have paid amounts by way of
donation that includes the cheque with a letter with a specific direction, which
is in compliance with Section (1) (b) of the Act. But, in case if the
contributions are made without cheques i.e., by cash, and oral direction has
been issued to the trust to utilise the said fund for the purpose of treating the
leprosy patients and if such amounts arc credited to the account meant for it,
even then the requirement of clause (b) of sub-section (1) of Section 11 is
complied with. Therefore, we do not see any substance in the said contention.
18. In fact, the assessee has filed returns. In the returns, he has specifically
mentioned that these contributions are received for the aforesaid purpose and
claimed exemptions. Assessing Authority being satisfied with the
requirements of Section 11(1) (b) is being fully complied with, has accepted
the same and granted exemption under the aforesaid provision. It is too late in
the day for the Commissioner for Directorate of Income Tax (exemptions) to
ignore all these undisputed facts which are available in the record and to
refuse to renew the registration, if is unfortunate that the higher authority has
not applied its mind in proper perspective to these provisions. The parliament
intended to pass on the benefit of exemption of payment of income tax to the
charitable and religious institutions. We are really surprised at the attitudes of
these authorities who are over-technical in denying the benefit to the
deserving institutions, which are rendering laudable services to the rural
masses. By not granting tax exemptions, which they deserve, the authorities
have hampered the said social activities of the trust and they are made to
waste their precious time, energy and money in fighting this litigation. We do
not appreciate this attitude on the part of the authorities in denying the benefit
which the parliament has given to such persons. Therefore, the Tribunal was
fully justified in interfering with such an illegal order and granted the relief to
the assessee for which it is entitled to. Unfortunately, the persons who took a
decision to file an appeal, before this Court are wasting the precious time of
the trust which could have been used in the social service. Public money and
the time of this Court is also wasted. This attitude on the part of the
department cannot be countenanced. Therefore, we feel it appropriate to
impose cost incurred by the assessee for fighting litigation so that the
department would be more careful in future in taking decision to file appeal in
such frivolous cases by ignoring the policy of the Government, viz., National
Litigation Policy, 2011. Hence, we pass the following order:
ORDER
The appeal is dismissed with cost of Rs. 1,00,000/- (Rupees one lakh) to be
deposited by the department within one month from today in favour of the
Rural Project Fund of the assessee-trust.
_____________
(2018) 5 ITJ Online 678 (Bombay)

Director of Income Tax (Exemption)
v.
Sheth Mafatlal Gagalbhai Foundation Trust
Shri S.H. Kapadia and Shri J.N. Patel, JJ.
ITA No. 267 to 272, 328, 330, 334 to 337, 351 to 355 and 373 to 375 of 2000
11th October, 2000
Modes of Investment-Charitable Trust-S.11(5) of Income Tax Act,
1961-Exemptions U/s. 13(1)(d) of Income Tax Act,1961 avaible at the
behest of Charitable Trust- Whether violation of Section 11(5) read with
Section 13(1)(d) by the assessee-trust attracts maximum marginal rate of tax
on the entire income of the trust-Scope of S. 164(2) of Income Tax Act,1961-
Held- Section 164 does not create a charge on the income of a discretionary
trust. The word ‘charge’ in Section 164 means ‘levy’. Section 164(2) refers to
the relevant income which is derived from property held under trust wholly
for charitable or religious purposes. If such income consists of severable
portions, exempt as well as taxable, the portion which is exempt is to be left
out and the portion which is not exempt is charged to tax as if it is the income
of an AOP. Therefore, a proviso was inserted by the Finance Act, 1984 with
effect from 01.04.1985 under which in cases where the whole or any part of
the relevant income is not exempt under Section 11 or Section 12 because of
the contravention of Section 13(1)(d), the tax shall be charged on such income
or part thereof, as the case may be, at the maximum marginal rate. In other
words, only the non-exempt income portion would fall in the net of tax as if it
was the income of an AOP.
-Section 11(5) lays down various modes or forms in which a trust is required
to deploy its funds. Section 13(1) lays down cases in which Section 11 shall
not apply. Under Section 13(1)(d)(iii), it has been laid down that any share in
a company, not being a Government company, held by the trust after
30.11.1983 shall result in forfeiture of exemption. By virtue of the proviso
(2021) ABC 111
(iia) it has been laid down that any asset which does not form part of
permissible investment under Section 11(5) shall be disposed of within one
year from the end of the previous year in which such asset is acquired or by
31.03.1993, whichever is later. In the present case, the assessee was required
to dispose of the shares under the said proviso by 31.03.1993 [See the
judgment of this Court in IT Appeal No. 81 of 1999 dated 14.09.2000]. The
shares have not been disposed of even during the Assessment Year in
question. Now, under Section 164(2), it is, inter alia, laid down that in the
case of relevant income which is derived from property held under trust for
charitable purposes, which is of the nature referred to in Section 11(4A), tax
shall be charged on so much of the relevant income as is not exempt under
Section 11.
-Section 164(2) was reintroduced by the Direct Tax Laws (Amendment) Act,
1989 with effect from 01.04.1989. Earlier it was omitted by the Direct Tax
Laws (Amendment) Act, 1987. However, the Legislature inserted a proviso
by the Finance Act, 1984 with effect from 01.04.1985. By the said proviso, it
is, inter alia, laid down that where whole or part of the relevant income is not
exempt by virtue of Section 13(1)(d), tax shall be charged on the relevant
income or part of the relevant income at the maximum marginal rate. The
phrase ‘relevant income or part of the relevant income’ is required to be read
in contradistinction to the phrase ‘whole income’ under Section 161(1A). This
is only by way of comparison. Under Section 161(1A), which begins with
a non obstante clause, it is provided that where any income in respect of
which a person is liable as a representative assessee consists of profits of
business, the tax shall be charged on the whole of the income in respect of
which such person is so liable at the maximum marginal rate. Therefore,
reading the above two phrases shows that the Legislature has clearly indicated
its mind in the proviso to Section 164(2) when it categorically refers to
forfeiture of exemption for breach of Section 13(1)(d), resulting in levy of
maximum marginal rate of tax only to that part of the income which has
forfeited exemption.
-It does not refer to the entire income being subjected to maximum marginal
rate of tax. This interpretation of ours is also supported by Circular No. 387,
dated 06.07.1984. Vide the said Circular, it has been laid down in Para 28.6
that where a trust contravenes section 13(1)(d), the maximum marginal rate of
Income Tax will apply only to that part of the income which has forfeited
exemption under the said provision and not to the entire income. We may also
add that in law there is a vital difference between eligibility for exemption and
withdrawal of exemption/forfeiture of exemption for contravention of the
provisions of law.
-These two concepts are different. They have different consequences. It is
interesting to note that although the Legislature withdrew section 164(2) by
the Direct Tax Laws (Amendment) Act, 1987 which provision was
reintroduced by the Direct Tax Laws (Amendment) Act 1989, the Legislature
did not touch the proviso to Section 164(2) which has been on the statute
book right from 01.04.1985. The said proviso was inserted by the Finance
Act, 1984. The proviso specifically refers to violation of Section 13(1)(d) and
its consequences.
-In the circumstances, we find merit in the contention of the assessee that in
the present case the maximum marginal rate of tax will apply only to the
dividend income from shares in Mafatlal Industries Ltd. and not to the entire
income. Therefore, income other than dividend income shall be taxed at
normal rate of taxation under the Act.
Final outcome – Appeal Dismissed In favour of Assessee.

Relevant Provisions : S.11, 13 & 164 of Income Tax Act,1961
Relevant Period: A.Y. 1994-95.
Counsel :
– R.V. Desai, J.P. Deodhar and P.S. Jetley, for the Appellant;
– F.B. Andhyarujina, R.N. Sidhwa and P.Y. Vaidya, for the Respondent.
Eqvivalent Citations: (2001) 114 Taxman 19 (Bombay) : (2001) 249 ITR
533 (Bombay) : (2001) 168 CTR 501 (Bombay)
JUDGMENT
Shri Kapadia, J. :
1. The short question of law which arises for determination in the above
group of appeals is as follows:
“Whether violation of Section 11(5) read with Section 13(1)(d) by the
assessee-trust attracts maximum marginal rate of tax on the entire income
of the trust ?”
In these appeals, we are essentially concerned with deciding the scope of
Section 164(2) read with its proviso as also the effect of contravention of
Section 11(5) and Section 13(1)(d)(iii) of the Income Tax Act, 1961 (‘the
Act’).
Facts
2. The assessee-trust came into existence after 01.06.1973. The assessee-
trust was a holder of equity shares of Mafatlal Industries during the
Assessment Year 1994-95. They were the holders of the shares even after
31.03.1993. In this group of appeals, we are only concerned with the effect of
the violation of Section 13(1)(d). There is no dispute about the contravention.
The assessee, during the relevant assessment year, received dividend income
from Mafatlal Industries of Rs. 15,103/-. The assessee also received interest
(2021) ABC 113
income of Rs. 2,095/-. These facts are taken from Income Tax Appeal No.
267 of 2000. The facts are common to all other appeals. Hence, by this
judgment, the above groups of appeals are disposed of as the facts are
common in all the above matters. The point of law is also common.
According to the Assessing Officer, on account of violation of Section 11(5),
the department took the stand that the assessee forfeited its exemption under
Section 11 in respect of its entire income, viz., dividend income plus interest
income, whereas, according to the assessee, they were entitled to claim
exemption and they were entitled to continuance of exemption in respect of
interest income though they had forfeited their right to claim exemption vis-a-
vis the dividend income as the assessees continued to hold the shares of non-
Government company even after 31.03.1993. Being aggrieved, the assessee
carried the matter in appeal to the Commissioner which came to the
conclusion that the assessee was not entitled to the benefit of exemption under
Section 11 in respect of the entire income. Being aggrieved, the assessee
carried the matter in appeal to the Tribunal. The Tribunal came to the
conclusion that in view of Section 164(1), the income receivable by the trust
was the relevant income and that a portion of such relevant income only
would suffer tax because of the violation of the condition of investment
prescribed by Section 11(5). The Tribunal found that non-fulfilment of such
condition cannot deprive the trust of the exemption of its other income which
has been granted to it in the earlier years. Hence, the Tribunal allowed the
appeal. It directed that only dividend income in the present case should be
taxed at maximum marginal rate and the income, other than the dividend
income, viz., interest income be taxed at normal rate of taxation as applicable
under the law.
Arguments
3. Mr. Desai, the Learned Senior Counsel appearing on behalf of the
department, contended that Section 11(5) provides for various forms and
modes of investing or depositing the money by the trust. He contended that
violation of Section 11(5) results in forfeiture of exemption given to the trust.
He contended that under Section 11(2) of the Act, it is provided that where 70
per cent of the income referred to in Clause (a) or Clause (b) of Section 11(1)
is not attracted to charitable or religious purposes in India during the previous
year, but is accumulated or set apart either in whole or in part for application
to such purposes, then such income so accumulated or set apart shall not be
included in the total income of the previous year provided certain conditions
are satisfied. He contended that violation of Section 11(5) results in
consequences which are specifically mentioned in Section 164(2) which, inter
alia, lays down that in the case of relevant income derived from property held
under trust, tax shall be charged on so much of the relevant income as is not
exempt under Section 11 as if the relevant income, not so exempt, was the
income of an AOP. In other words, he contended that in view of Section
164(2), forfeiture of exemption for breach of Section 11(5) would result in
imposition of tax at maximum marginal rate as if the assessee was an AOP.
He contended that by a deeming fiction the Legislature has provided for an
assessee-trust to be assessed as an AOP consequent upon its violation of
Section 11(5). He, accordingly, contended that the entire income of the trust
was liable to be charged to tax under maximum marginal rate and on the basis
of such income accruing to an AOP.
4. On the other hand, Mr. Andhyarujina, the learned counsel appearing on
behalf of the trust, contended that the requirement of investment in specified
securities under Section 11(5) results in an income to the trust which is
receivable by the trustees and it is called as relevant income under Section
164(1). He contended that a portion of such relevant income, in the present
case, would suffer tax because the condition of investment, as prescribed
under Section 11(5), had not been fulfilled, but non-fulfilment of such
condition cannot deprive the trust of the exemption of its other income which
had been granted in the earlier years. He contended that in this connection the
proviso to Section 164(2) is very important. He contended that under the said
proviso, the Legislature has clearly contemplated that in a case where the
whole or part of the relevant income is not exempt under Section 11 by virtue
of violation of Section 13(1)(d), tax shall be charged on the relevant income
or a part of the relevant income at the maximum marginal rate. In this
connection, he relied upon the Circular issued by the Board bearing No. 387,
dated 06.07.1984 which supports his above contention.
Findings
5. For the purposes of this appeal, it would be relevant to quote Section
164(2) read with its proviso:
“164(2) In the case of relevant income which is derived from property
held under trust wholly for charitable or religious purposes, or which is
of the nature referred to in sub-clause (iia) of Clause (24) of Section 2, or
which is of the nature referred to in sub-section (4A) of Section 11, tax
shall be charged on so much of the relevant income as is not exempt
under Section 11 or Section 12, as if the relevant income not so exempt
were the income of an association of persons :
Provided that in a case where the whole or any part of the relevant
income is not exempt under Section 11 or Section 12 by virtue of the
provisions contained in Clause (c) or Clause (d) of sub-section (1) of
Section 13, tax shall be charged on the relevant income or part of
relevant income at the maximum marginal rate.”
6. Section 164 does not create a charge on the income of a discretionary
trust. The word ‘charge’ in Section 164 means ‘levy’. Section 164(2) refers to
the relevant income which is derived from property held under trust wholly
for charitable or religious purposes. If such income consists of severable
portions, exempt as well as taxable, the portion which is exempt is to be left
out and the portion which is not exempt is charged to tax as if it is the income
of an AOP. Therefore, a proviso was inserted by the Finance Act, 1984 with
effect from 01.04.1985 under which in cases where the whole or any part of
(2021) ABC 115
the relevant income is not exempt under Section 11 or Section 12 because of
the contravention of Section 13(1)(d), the tax shall be charged on such income
or part thereof, as the case may be, at the maximum marginal rate. In other
words, only the non-exempt income portion would fall in the net of tax as if it
was the income of an AOP. Section 11(5) lays down various modes or forms
in which a trust is required to deploy its funds. Section 13(1) lays down cases
in which Section 11 shall not apply. Under Section 13(1)(d)(iii), it has been
laid down that any share in a company, not being a Government company,
held by the trust after 30.11.1983 shall result in forfeiture of exemption. By
virtue of the proviso (iia) it has been laid down that any asset which does not
form part of permissible investment under Section 11(5) shall be disposed of
within one year from the end of the previous year in which such asset is
acquired or by 31.03.1993, whichever is later. In the present case, the assessee
was required to dispose of the shares under the said proviso by 31.03.1993
[See the judgment of this Court in IT Appeal No. 81 of 1999 dated
14.09.2000]. The shares have not been disposed of even during the
Assessment Year in question. Now, under Section 164(2), it is, inter alia, laid
down that in the case of relevant income which is derived from property held
under trust for charitable purposes, which is of the nature referred to in
Section 11(4A), tax shall be charged on so much of the relevant income as is
not exempt under Section 11. Section 164(2) was reintroduced by the Direct
Tax Laws (Amendment) Act, 1989 with effect from 01.04.1989. Earlier it was
omitted by the Direct Tax Laws (Amendment) Act, 1987. However, the
Legislature inserted a proviso by the Finance Act, 1984 with effect from
01.04.1985. By the said proviso, it is, inter alia, laid down that where whole
or part of the relevant income is not exempt by virtue of Section 13(1)(d), tax
shall be charged on the relevant income or part of the relevant income at the
maximum marginal rate. The phrase ‘relevant income or part of the relevant
income’ is required to be read in contradistinction to the phrase ‘whole
income’ under Section 161(1A). This is only by way of comparison. Under
Section 161(1A), which begins with a non obstante clause, it is provided that
where any income in respect of which a person is liable as a representative
assessee consists of profits of business, the tax shall be charged on the whole
of the income in respect of which such person is so liable at the maximum
marginal rate. Therefore, reading the above two phrases shows that the
Legislature has clearly indicated its mind in the proviso to Section 164(2)
when it categorically refers to forfeiture of exemption for breach of Section
13(1)(d), resulting in levy of maximum marginal rate of tax only to that part
of the income which has forfeited exemption. It does not refer to the entire
income being subjected to maximum marginal rate of tax. This interpretation
of ours is also supported by Circular No. 387, dated 06.07.1984. Vide the said
Circular, it has been laid down in Para 28.6 that where a trust contravenes
section 13(1)(d), the maximum marginal rate of Income Tax will apply only
to that part of the income which has forfeited exemption under the said
provision and not to the entire income. We may also add that in law there is a
vital difference between eligibility for exemption and withdrawal of
exemption/forfeiture of exemption for contravention of the provisions of law.
These two concepts are different. They have different consequences. It is
interesting to note that although the Legislature withdrew section 164(2) by
the Direct Tax Laws (Amendment) Act, 1987 which provision was
reintroduced by the Direct Tax Laws (Amendment) Act 1989, the Legislature
did not touch the proviso to Section 164(2) which has been on the statute
book right from 01.04.1985. The said proviso was inserted by the Finance
Act, 1984. The proviso specifically refers to violation of Section 13(1)(d) and
its consequences. In the circumstances, we find merit in the contention of the
assessee that in the present case the maximum marginal rate of tax will apply
only to the dividend income from shares in Mafatlal Industries Ltd. and not to
the entire income. Therefore, income other than dividend income shall be
taxed at normal rate of taxation under the Act.
7. Accordingly, the above question is answered in the negative, i.e., in
favour of the assessee and against the department. Question No. 1 is answered
in our judgment in IT Appeal No. 81 of 1999.
8. Accordingly, all the above appeals are disposed of with no order as to
costs.
_____________
(2018) 5 ITJ Online 679 (Bombay)
Pr. Commissioner of Income Tax
v.
Quest Investment Advisors (P.) Ltd.
Shri M. S. Sanklecha and Shri Sandeep K. Shinde, JJ.
IT Appeal No. 280 of 2016
28th June, 2018
Disallowance-S.37(1) of Income Tax Act,1961-Appeal against the order of
tribunal deleting Disallowance under section 37(1) of Income tax Act,1961-
Held- The principle accepted by the Revenue for 10 earlier years and 4
subsequent years to the Assessment Years 2007-08 and 2008-09 was that the
entire expenditure is to be allowed against business income and no
expenditure is to be allocated to capital gains. Once this principle was
accepted and consistently applied and followed, the Revenue was bound by it.
-Unless of course it wanted to change the practice without any change in law
or change in facts therein, the basis for the change in practice should have
been mentioned either in the assessment order or atleast pointed out to the
Tribunal when it passed the impugned order. None of this has happened.
-In fact, all have proceeded on the basis that there is no change in the
principle which has been consistently applied for the earlier assessment years
(2021) ABC 117
and also for the subsequent assessment years.

-Therefore, the view of the Tribunal in allowing the respondent's appeal on
the principle of consistency cannot in the present facts be faulted with, as it is
in accord with the Apex Court decision in Bharat Sanchar Nigam Ltd.'s case
(supra)
Final outcome – Appeal Dismissed.

Relevant Provisions : S.37 of Income Tax Act,1961
Radhasoami Satsang v. CIT, (2016) 2 ITJ Online 808 (SC) : (1992) 193 ITR
321 : (1991) 100 CTR 267 : (1992) 60 Taxman 248 [Refer Para 5,6]
Bharat Sanchar Nigam Ltd. v. Union of India, (2016) 1 ITJ Online 538
(SC) : (2013) 8 STD 69 : (2006) 282 ITR 273 : (2006) 201 CTR 346 : (2006)
152 Taxman 135 : (2006) 5 ITJ 597 : (2006) 3 SCC 1 [Refer Para 8,9]
Counsel :
– N.C. Mohanty, for the Appellant;
– Ajaykumar R. Singh, for the Respondent.
Eqvivalent Citations: (2018) 257 Taxman 211 (Bombay) : (2018) 409
ITR 545 (Bombay)
ORDER
1. This appeal under Section 260A of the Income Tax Act, 1961 (the Act)
challenges the order dated 20th May, 2018 passed by the Income Tax
Appellate Tribunal (the Tribunal) for Assessment Year 2008-09.
2. The Revenue urges the following questions of law for our
consideration:–
(i) Whether on the fact and circumstances of the case and in law, the
Tribunal was justified in deleting the disallowance made u/s 37(1)
without appreciating the facts of the case and legal matrix as clearly
brought out by the AO and the CIT (A)?
(ii) Whether on the facts and circumstances of the case and in law, the
Tribunal was justified in following the rule of consistency and the case of
Radhasoami Satsang without going into merits of the case?
3. The respondent is engaged in the business of equity research, investment
advisory services and running portfolio management services. During the
subject assessment year, the respondent assessee in its return of income
showed professional income of Rs.1.31 crores and short term capital gain of
Rs.6 crores. As was the practice for the earlier assessment years and accepted
by the Revenue, all the expenses was set off against the professional business
income. However, the Assessing Officer sought to allocate the expenditure
between earning of capital gains and professional income. Thus, an
expenditure of Rs.88.05 lakhs claimed against professional income was
disallowed by the assessment order dated 15th November, 2010 under Section
143(3) of the Act.
4. Being aggrieved, the respondent carried the issue in appeal to the
Commissioner of Income Tax (Appeals) [CIT (A)]. By an order dated 21st
November, 2011, the respondent's appeal was dismissed.
5. Thus, the respondent carried the issue in further appeal to the Tribunal.
The impugned order of the Tribunal without going to the merits of the action
of the Assessing Officer in allocating the expenses between the professional
income and capital gains, proceeded to allow the appeal on the basis of
principle of consistency. It observed that for the assessment years relating to
Assessment Years 1995-96 to 2012-13, no such allocation of expenses
between professional income and the earning on account of capital gain was
made. All expenses were allowed to be set off against the professional
income. It is only for two assessment years namely Assessment Years 2008-
09 and 2007-08 that the Assessing Officer had done this exercise of allocating
the expenditure under the heads of business income and capital gain. The
Revenue before the Tribunal as recorded in the impugned order, was not able
to point out any distinguishing facts in the subject assessment year, which
would warrant a different view from that taken in the earlier and subsequent
assessment where no allocation of expenditure was done between various
heads of income. Therefore, on application of the principles of consistency
following the decision of the Apex Court in Radhasoami
Satsang v. CIT, (2016) 2 ITJ Online 808 (SC) : (1992) 193 ITR 321 : (1991)
100 CTR 267 : (1992) 60 Taxman 248 the respondent's appeal was allowed.
6. Mr. Mohanty, Learned Counsel appearing for the Revenue urges that the
decision of the Apex Court in Radhasoami Satsang (supra) would have no
application to the facts of the present case for two reasons viz. (a) that the
decision itself states that it is restricted to the facts of the case before it and
would not have general application; and (b) Besides, it is submitted that the
issue of expenses to be allowed and / or income to be assessed would be a
subject matter of separate consideration for each year that is unlike an issue
deciding a status of a person and / or a property which would in the absence
of any change in law and / or facts would permeate through various years.
Thus, the impugned order of the Tribunal is not sustainable and the appeal
requires admission.
7. We note that the impugned order of the Tribunal records the fact that the
Revenue Authorities have consistently over the years i.e. for the 10 years
years prior to Assessment Years 2007-08 and 2008-09 and for 4 subsequent
years, accepted the principle that all expenses which has been incurred are
attributable entirely to earning professional income. Therefore, the Revenue
allowed the expenses to determine professional income without any amount
(2021) ABC 119
being allocated to earn capital gain. In the subject assessment year, the
Assessing Officer has deviated from these principles without setting out any
reasons to deviate from an accepted principle. Moreover, the impugned order
of the Tribunal also records that the Revenue was not able to point out any
distinguishing features in the present facts, which would warrant a different
view in the subject assessment year from that taken in the earlier and
subsequent assessment years. So far as the decision of Radhasoami
Satsang (supra) is concerned, it is true that there are observations therein that
restrict its applicability only to that decision and the Court has made it clear
that the decision should not be taken as an authority for general applicability.
8. However, subsequently the Apex Court in Bharat Sanchar Nigam
Ltd. v. Union of India, (2016) 1 ITJ Online 538 (SC) : (2013) 8 STD 69 :
(2006) 282 ITR 273 : (2006) 201 CTR 346 : (2006) 152 Taxman 135 : (2006)
5 ITJ 597 : (2006) 3 SCC 1 has after referring to the decision of Radhasoami
Satsang (supra) has observed as under :–
“20. The decisions cited have uniformly held that res judicata does not
apply in matters pertaining to tax for different assessment years because
res judicata applies to debar courts from entertaining issues on the same
cause of action whereas the cause of action for each assessment year is
distinct. The courts will generally adopt an earlier pronouncement of the
law or a conclusion of fact unless there is a new ground urged or a
material change in the factual position. The reason why courts have held
parties to the opinion expressed in a decision in one assessment year to
the same opinion in a subsequent year is not because of any principle of
res judicata but because of the theory of precedent or the precedential
value of the earlier pronouncement. Where facts and law in a subsequent
assessment year are the same, no authority whether quasi-judicial or
judicial can generally be permitted to take a different view. This mandate
is subject only to the usual gateways of distinguishing the earlier
decision of where the earlier decision is per incuriam. However, these are
fetters only on a co-ordinate Bench which, failing the possibility of
availing of either of these gateways, may yet differ with the view
expressed and refer the matter to a Bench of superior strength or in some
cases to a Bench of superior jurisdiction.”
(Emphasis supplied)
9. The principle accepted by the Revenue for 10 earlier years and 4
subsequent years to the Assessment Years 2007-08 and 2008-09 was that the
entire expenditure is to be allowed against business income and no
expenditure is to be allocated to capital gains. Once this principle was
accepted and consistently applied and followed, the Revenue was bound by it.
Unless of course it wanted to change the practice without any change in law
or change in facts therein, the basis for the change in practice should have
been mentioned either in the assessment order or atleast pointed out to the
Tribunal when it passed the impugned order. None of this has happened. In
fact, all have proceeded on the basis that there is no change in the principle
which has been consistently applied for the earlier assessment years and also
for the subsequent assessment years. Therefore, the view of the Tribunal in
allowing the respondent's appeal on the principle of consistency cannot in the
present facts be faulted with, as it is in accord with the Apex Court decision
in Bharat Sanchar Nigam Ltd.'s case (supra).
10. Accordingly, the question as proposed do not gives rise to any substantial
question of law. Thus, not entertained.
11. Appeal is dismissed. No order as to costs.
_____________
(2018) 5 ITJ Online 681 (Bom.)
Director of Income Tax (Exemptions), Mumbai
v.
Jasubhai Foundation
Shri S.C. Dharmadhikari and Shri A.K. Menon, JJ.
ITA No. 1310 of 2013
1st April, 2015
Exemptions-S. 10(33) & 10(38) of Income tax Act,1961-Appeal Against the
Order of Tribunal upholding exemptions-Whether, on the facts and in the
circumstances of the case and in law, the Hon'ble Tribunal was justified in
granting exemption u/s. 10(33) and 10(38) to the tune of Rs. 25.96 lakhs and
Rs. 3.21 lakhs respectively, when this income forms a part of the income from
property held under trust and therefore can only be claimed to be exempt u/s.
11, if applied for charity and not u/s. 10 of the Act-Held-That the Tribunal
was correct in setting aside these concurrent orders. The language of the two
sections is plain and clear. The provisions, namely, sections 10 and 11 fall
under a Chapter which is titled "Incomes Which Do Not Form Part of Total
Expenditure" (Chapter III). Section 10 deals with incomes not included in
total income whereas Section 11 deals with income from property held for
charitable or religious purposes.
- The income which is not to be included in computation of the total income is
a matter dealt with by Section 10 and by Section 11 the case of an assessee
who has received income derived from property held under trust only for
charitable or religious purposes to the extent to which such income is applied
to such property in India and that any such income is accumulated or set apart
for application for such purposes in India to the extent of which the income so
accumulated or set apart in computing 15% of the income of such property, is
dealt with. Therefore, it is a particular assessee and who is in receipt of such
income as is falling under clause (a) of sub-section (1) of Section 11 who
would be claiming the exemption or benefit. That is a income derived by a
person from property. It is that which is dealt with and if the property is held
(2021) ABC 121
in trust for the specified purpose, the income derived therefrom is exempt and
to the extent indicated in Section 11(1)(a) of the Income Tax Act, 1961. There
is nothing in the language of Sections 10 or 11 which says that what is
provided by Section 10 or dealt with is not to be taken into consideration or
omitted from the purview of Section 11.

Relevant Provisions : S.10 & 11 of Income Tax Act,1961
Counsel :
– A.R. Malhotra and N.A. Kazi, for the Appellant;
– Dr. K. Shivram, Sr. Counsel, for the Respondent.
Eqvivalent Citations : (2015) 374 ITR 315 (Bom) : (2015) 280 CTR 551
(Bom)
JUDGMENT
Shri S.C. Dharmadhikari, J. :
1. This appeal of the Revenue challenges the order passed by the Income
Tax Appellate Tribunal dated 14th November, 2012. The Assessment Year in
question is 2007-08.
2. The Tribunal dealt with an appeal of the Revenue, cross objections of the
assessee and an appeal by the assessee. All these were directed against a
common order passed by the Commissioner of Income Tax (Appeals) on 14th
February, 2011. Mr. Malhotra, the learned counsel appearing on behalf of the
Revenue in support of this appeal submits that this appeal raises substantial
questions of law. They are formulated at pages 4 and 5 of the paper-book.
They read as under:
“(A.) Whether, on the facts and in the circumstances of the case and in
law, the Hon'ble Tribunal was justified in granting exemption u/s. 10(33)
and 10(38) to the tune of Rs. 25.96 lakhs and Rs. 3.21 lakhs respectively,
when this income forms a part of the income from property held under
trust and therefore can only be claimed to be exempt u/s. 11, if applied
for charity and not u/s. 10 of the Act?
(B.) Whether, on the facts and in the circumstances of the case and in
law, the Hon'ble Tribunal was justified in holding that the entire
foundation of Section 11 is based on the premise that the income is
otherwise chargeable to tax, which is not supported by the provisions of
the Act?
(C.) Whether, on the facts and in the circumstances of the case and in
law, the Hon'ble Tribunal was justified in granting exemption u/s. 10,
when the same amounts to allowance of exemption within exemption
whereby dividend income and long term capital gain derived from
property held under trust but not applied for purposes of the trust is held
to be exempt?
(D.)Whether, on the facts and in the circumstances of the case and in
law, the Hon'ble Tribunal was justified in giving relief to the assessee in
respect of Rs. 30 lakhs which was accumulated and set aside u/s. 11(2) of
the Act but not utilized for the specified purpose within the stipulated
period of five years?
(E.) Whether, on the facts and in the circumstances of the case and in
law, the Hon'ble Tribunal was justified in giving relief to the assessee in
respect of Rs. 30 lakhs which was accumulated and set aside u/s. 11(2) of
the Act for the purpose of setting up of Digital Research and Training
Centre but donated to another Trust i/e. Synapse, which cannot be
constructed to have been fulfilled the purpose of accumulation?”
3. In relation to the first three questions Mr. Malhotra would submit that the
Assessing Officer committed no mistake and his understanding of the
provisions of law was accurate. Chapter III of the Income Tax Act, 1961,
according to Mr. Malhotra, is entitled 'Incomes Which Do Not Form Part of
Total Income'. Mr. Malhotra submits that the term "total income" appearing in
Section 10 and the wording of Section 11 would indicate as to how what shall
not be included in terms of Section 10 in computing the total income of a
previous year of any person will not govern the interpretation of Section 11.
That section deals with income from property held for charitable or religious
purpose. Sub-section (1) of that Section has in clear terms stated that subject
to the provisions of Sections 60 to 63, the following income shall not be
included in the total income of the previous year of the person in receipt of the
income offered therein. Therefore, the Assessing Officer held that for the
purposes of fulfillment of the conditions of Section 11 and Section 12,
particularly on application of the income derived from property held under
trust wholly for charitable or religious purpose had not been further subjected
to any exclusion. It is only the exemption in terms of Section 11 which would
apply and in relation to persons like the assessee before us. From their income
there is no scope for exclusion of what is grantable under Section 10(33) and
Section 10(38) of the Income Tax Act. Thus, the assessee would not be
entitled to claim these benefits. That would sub-serve the purpose of the Act
as well.
4. In answer to this submission of Mr. Malhotra, Dr. Shivram, senior
counsel appearing on behalf of the assessee would submit that insofar as
Chapter III of the Income Tax Act is concerned, though it is titled as
"Incomes Which Do Not Form Part of Total Income", as far as Section 10 is
concerned, that deals with incomes not included in total income and as far as
(2021) ABC 123
Section 11 is concerned income from property held for charitable or religious
purposes is dealt with by it. There is no scope for the argument that from the
total income of any person which may include a trust or an assessee before us,
the exclusion in terms of Section 10 would not apply. It is after such
exclusions that the income from property held for charitable or religious
purposes would have to be dealt with and in that amount the matters covered
by section 11 would not be included. Therefore, when the words total income
of the previous year of the person in receipt of the income have been used in
both places, then, there was no scope for the Assessing Officer to arrive at the
conclusion which he did. He was rightly corrected though his view was
confirmed by the Commissioner of Income Tax (Appeals). The Tribunal's
order does not give rise to the questions of law and particularly formulated as
Questions (A) to (C).
5. In relation to the other three questions, Mr. Malhotra would submit that
the Tribunal erred in holding that the Commissioner's direction to the
Assessing Officer to reconsider the assessee's claims deserves to be set aside.
The Commissioner had directed that the Assessing Officer should verify
whether Rs. 30,00,000/- which was accumulated and set aside under Section
11(2) was utilised for the specified purpose and within the stipulated period.
Now, the assessee claims that this sum was indeed utilised for setting up of
Digital Research and Training Centre. However, that was donated to another
trust and hence the condition stipulated in Section 11(2) of the Income Tax
Act was not satisfied. There was no harm in the Assessing Officer making the
necessary verification, scrutiny and enquiry. Therefore, these questions are
also substantial questions of law.
6. On the other hand, Dr. Shivram would submit that the Tribunal
concluded that all the details were before the Commissioner. Out of the total
expenses of Rs. 48,78,000/- incurred during the period relevant to Assessment
Year 2002-03, a sum of Rs. 30,00,000/- has been spent out of accumulated
amount. When the amount accumulated for the assessment year 2001-02 has
been fully spent during the period relevant to Assessment Year 2002-03, then,
the condition was fully satisfied. There was no reason to send the matter back.
This finding recorded in paragraph 5 of the order of the Tribunal, according to
Dr. Shivram, does not raise any substantial question of law. It is essentially
factual. Therefore, on both counts, the appeal does not deserve to succeed and
ought to be dismissed.
7. We have, with the assistance of the Counsel appearing for both sides,
perused the appeal paper-book and the impugned orders. The Assessing
Officer was of the view that the return of income which was filed along with
income and expenditure account, balance sheet, audited report and by
assessee claiming to be a charitable organization needs scrutiny in the light of
the legal provision and namely Section 11 of the Income Tax Act. The
Assessing Officer noted that a sum of Rs. 25,96,287/- received on account of
dividend income is claimed as exempt under Section 10(33) of the Income
Tax Act. However, this income forms a part of the income from trust property
and, therefore, can only be claimed to be exempt under Section 11 of the
Income Tax Act if applied for charity and not under Section 10(33) of the
Income Tax Act. Claim of exemption under Section 10(33) of the Income Tax
Act is, therefore, not allowable. Similar is the position with regard to the sum
received of Rs. 3,21,124/- on account of long term capital gain on redemption
of mutual fund investment. That cannot be claimed as exempt under Section
10(38) of the Income Tax Act. This finding of the Assessing Officer is based
only on reading of Sections 10, 11, 12 and 13. In his view, if the provisions of
Section 11, 12, and 13 of the Income Tax Act are the governing provisions
and relate to exemption claimed by charitable institutions, then, the assessee
has no option to choose whether it wants to avail the exemption under Section
10(33) or Section 11 of the Income Tax Act, 1961. He relied upon a circular
of 1968 issued by the Central Board of Direct Taxes. He also relied upon the
language of Section 11(1) and the expression "total income" defined in
Section 2(45) of the Income Tax Act, 1961, as the total amount of income
computed in the manner laid down in this Act. The Assessing Officer was of
the view that the word "income" used in Section 11(1)(a) does not have the
same meaning as has been specifically assigned to the expression "total
income" vide Section 2(45) of the Act.
8. Upon a perusal of the order of the Assessing Officer and that of the
Commissioner upholding it, we are of the view that the Tribunal was correct
in setting aside these concurrent orders. The language of the two sections is
plain and clear. The provisions, namely, sections 10 and 11 fall under a
Chapter which is titled "Incomes Which Do Not Form Part of Total
Expenditure" (Chapter III). Section 10 deals with incomes not included in
total income whereas Section 11 deals with income from property held for
charitable or religious purposes. We have not found anything in the language
of the two provisions nor was Mr. Malhotra able to point out as to how when
certain income is not to be included in computing total income of a previous
year of any person, then, that which is excluded from Section 10 could be
included in the total income of the previous year of the person/assessee. That
may be a person who receives or derives income from property held under
trust wholly for charitable or religious purposes. Thus, the income which is
not to be included in computation of the total income is a matter dealt with by
Section 10 and by Section 11 the case of an assessee who has received income
derived from property held under trust only for charitable or religious
purposes to the extent to which such income is applied to such property in
India and that any such income is accumulated or set apart for application for
such purposes in India to the extent of which the income so accumulated or
set apart in computing 15% of the income of such property, is dealt with.
Therefore, it is a particular assessee and who is in receipt of such income as is
falling under clause (a) of sub-section (1) of Section 11 who would be
claiming the exemption or benefit. That is a income derived by a person from
property. It is that which is dealt with and if the property is held in trust for
(2021) ABC 125
the specified purpose, the income derived therefrom is exempt and to the
extent indicated in Section 11(1)(a) of the Income Tax Act, 1961. There is
nothing in the language of Sections 10 or 11 which says that what is provided
by Section 10 or dealt with is not to be taken into consideration or omitted
from the purview of Section 11. If we accept the argument of Mr. Malhotra
and the Revenue, the same would amount to reading into the provisions
something which is expressly not there. In such circumstances, the Tribunal
was right in its conclusion that the income which in this case the assessee trust
has not included by virtue of Section 10, then, that cannot be considered under
Section 11.
9. In the circumstances and when the income from property held for
charitable or religious purpose is not a matter covered or dealt with by Section
10 that the Tribunal's view cannot be termed as perverse or vitiated by any
error or law apparent on the face of the record. The clear language of these
provisions enables us to uphold the order of the Tribunal. It is, accordingly,
upheld. The Revenue's appeal does not raise any substantial question of law.
10. Even with regard to other two matters, we do not think that the Tribunal
order raises any substantial question of law. The Tribunal has interfered with
the direction of the Commissioner. That was a direction which was not called
for according to the Tribunal. Thus, a remittance or remand back to the
Assessing Officer was unnecessary because all factual materials were already
on record and before the Commissioner as also the Tribunal. In the
circumstances and when there was no dispute on facts that the
Commissioner's order was interfered with. The same also does not raise any
substantial question of law.
11. As a result of the above discussion, the appeal fails and is dismissed.
There will be no order as to costs.
_____________
(2018) 5 ITJ Online 682 (Mum.)
In the ITAT Mumbai Bench
Anuj Jayendra Shah
v.
Shri Joginder Singh, JM and Shri Ramit Kochar, AM
ITA No. 2546 (MUM.) of 2015
30th December, 2015
Revision Notice- S. 263 of Income Tax Act,1961-Scrutiny Assessment-
S.143(3) of Income Tax Act,1961-The learned Principle Commissioner of
Income tax 35, Mumbai has erred in setting aside Assessment Order for
making it de novo for redeciding the issue related to the claim of receipt of
gift of Rs. 148,00,000/- even though the receipt of such gift was fully verified
by the learned Assessing Officer-Show cause Notice U/s. 263 of Income Tax
Act,1961-Held-during the course of the assessment proceedings, the assessee

has submitted an affidavit dated 30.12.2010 of the donor to establish the
identity and creditworthiness of the donor and to prove the genuineness of the
gift and the AO merely accepted the same without making any further enquiry
or verification. In our considered opinion, the facts of the case of the assessee
is similar to the facts in the case of Malabar Industrial Co. Ltd. (supra)
whereby no enquiry/verification is made by the AO while submissions of the
assessee were simply accepted. Moreover, now Explanation 2 to Section 263
of the Act is inserted in the statute which is declaratory in nature to provide
clarity on the issue whereby if the AO failed to make any enquiry or
necessary verification which should have been made, the order becomes
erroneous and prejudicial to the interest of revenue
-Regarding the contention of the assessee that the Pr. CIT is not clear about
the Section 68 or Section 56 of the Act to be invoked, whereby the income is
to be brought to tax from other sources and in case the assesse has received
any sum from the close relatives, Section 56 of the Act grants exemption for
bringing into tax such income under the head income from other sources. But,
however, Section 68 of the Act contemplates that with respect to any credit in
the books, it is an obligation cast upon the assessee to explain the credit as
appearing in the books of the assessee to the satisfaction of the AO by
establishing the identity and creditworthiness of the creditors and genuineness
of the transaction. This initial and primary burden is cast upon the assessee u/s
68 of the Act to establish the identity and creditworthiness of the donor and to
substantiate that the transaction is genuine.
-Thus, both the sections viz. Section 56 and 68 of the Act operate in different
field whereas Section 56 of the Act deals with computation of the income of
the tax payer under the head 'Income from other sources' which provides relief
in case of receipts from close relatives as defined u/s 56 of the Act while
Section 68 of the Act is placed under Chapter VI of the Act which deals with
'Aggregation of income and set off or carry forward of loss' and Section 68 of
the Act cast primary onus on the assessee to explain nature and source of cash
credit as appearing in the books of the assessee to the satisfaction of the AO
and failure to explain the cash credit to the satisfaction of the AO shall lead to
computation of income from undisclosed sources under the head 'Income
from other sources'.
-Thus, in our considered view based on the facts as emanating from the
records, the AO has not made any enquiry or verification before accepting the
gift of Rs. 1.48 crores received by the assessee from his maternal uncle, Mr
Chimanlal Mehta and has merely accepted the submissions of the assessee
with respect to receipt of said gift and the Pr. CIT has rightly invoked the
provisions of Section 263 of the Act directing the AO to make proper enquiry
and reframe the assessment.
-The case laws relied upon by the assessee are not applicable in this case as in
the instant appeal, the AO has not made any inquiries or verification which
(2021) ABC 127
should have been made to satisfy the ingredients of Section 68 of the Act and
has merely accepted the submissions of the assessee with respect to the gift of
Rs. 1,48,00,000/- received by the assessee from his maternal uncle

Relevant Provisions : S.263,56,68,143 of Income Tax Act,1961
Allied Motors (P.) Ltd. v. CIT, (2019) 7 ITJ Online 166 (SC) : (2019) 18
STD 372 (1997) 224 ITR 677: 91 Taxman 205 [Refer Para 11]
Brij Mohan Das Laxman Das v. CIT, (2016) 2 ITJ Online 763 (SC) : (1997)
223 ITR 825 : (1997) 138 CTR 214 : (1997) 90 Taxman 41 [Refer Para 11]
CIT v. Gabriel India Ltd., (2016) 1 ITJ Online 948 (Bombay) : (1993) 203
ITR 108 : (1993) 114 CTR 81 : (1993) 71 Taxman 585 [Refer Para 6,11]
CIT v. Podar Cement (P.) Ltd,(2016) 1 ITJ Online 956 (SC) : (1997) 226
ITR 625 : (1997) 141 CTR 67 : (1997) 92 Taxman 541 [Refer Para 11]
CIT v. Sohana Wollen Mills, (2008) 296 ITR 238 (P&H). [Refer Para 6,11]
DIT v. Jyoti Foundation, (2016) 2 ITJ Online 783 (Delhi) : (2013) 357 ITR
388 : (2013) 219 Taxman 105 [Refer Para 6,11]
Globus Infocom Ltd. v. CIT, (2016) 2 ITJ Online 779 (Delhi) : (2014) 369
ITR 14 : (2014) 227 Taxman 48 [Refer Para 6,11]
Malabar Industrial Co. Ltd. v. CIT, (2018) 5 ITJ Online 298 (SC) : (2000)
243 ITR 83 : (2000) 159 CTR 1 : (2000) 109 Taxman 66 : (2016) 28 ITJ 133
[Refer Para 10,11]
Sundaram Pillai v. Pattabiram, (1985) 1 SCC 591 [Refer Para 9]
Counsel :
– Ms. Aarti Vissanji, for the Appellant;
– Yeshwant V. Chavan, for the Respondent.
ORDER
Shri Ramit Kochar, AM. :
1. This appeal, filed by the assessee, being ITA No. 2546/Mum/2015, is
directed against the orders dated 25.03.2015 passed by the Learned Principal
Commissioner of Income Tax - 35, Mumbai (Hereinafter called "the Pr.
CIT"), for the Assessment Year 2010-11.
2. The Grounds of appeal raised by the assessee in the memo of appeal filed
with the Tribunal read as under:–
“(i) The learned Principle Commissioner of Income tax 35, Mumbai has
erred in setting aside Assessment Order for making it de novo for
redeciding the issue related to the claim of receipt of gift of Rs.
148,00,000/- even though the receipt of such gift was fully verified by
the learned Assessing Officer.
(ii) The Appellant craves leave to add, alter, vary, omit, substitute or
amend the above ground of appeal, at any time before or at, the time of
hearing, of the appeal, so as to enable to learned Commissioner
(Appeals) to decide the appeals according to law. .”
3. The Brief facts of the case are that the assessee's case was selected for
scrutiny under CASS. As per the AIR information, the assessee has purchased
units of Deutsche Mutual Funds for Rs. 1,45,00,000/- on 15.05.2009 and for
Rs. 12,00,000/- on 20.05.2009. The assessee also purchased immovable
property of Rs. 5,27,00,000/- on 30.12.2009. To examine the sources of
investment in Mutual Fund and immovable property as reported in ITS under
AIR, notice u/s 143(2) read with Section 142(1) of Income Tax
Act,1961(Hereinafter called "the Act") was issued by the learned Assessing
Officer (Hereinafter called "the AO"). During the course of the assessment
proceedings u/s 143(3) of the Act read with Section 143(2) of the Act, the
assessee submitted that it has invested Rs. 1.45 crores on 15.05.2009 and Rs.
12 lacs on 20.05.2009 in Deutsche Bank Mutual Fund, out of gift of Rs.
1,48,00,000/- received from his maternal uncle Shri Kumar Chimanlal Mehta
vide Cheque No. 221429 dated 08.05.2009 and submitted affidavit dated
30.12.2010 executed by his uncle Mr. Kumar Chimanlal Mehta .Similarly, the
assessee explained the sources of investment in the flat no 1101, 11 th Floor,
Raheja Excelor, 63, Tardeo Road, Mumbai-400034. The AO accepted the
returned income and made no addition to the income of the assessee in the
assessment order u/s 143(3) dated 08.03.2013 passed by the AO and
accordingly total income was computed at Rs. 36,73,810/- vide assessment
order u/s 143(3) of the Act dated 08.03.2013 which was also the returned
income filed with the Revenue by the assessee.
4. The Pr. CIT issued the notice dated 14.01.2015 w.r.t. revision of income
u/s 263 of the Act for the Assessment Year 2010-11. Thereafter, The assessee
was show caused by the Pr. CIT vide three show cause notices u/s 263 of the
Act dated 12.02.2015, 26.02.2015 and 17.03.2015 with respect to the receipt
of the gift of Rs. 1,48,00,000/- from assessee's maternal uncle Shri Kumar
Chimanlal Mehta by the assessee during the previous year on 08 th May 2009.
The Pr. CIT observed that the claim of the assessee during the assessment
proceedings was that the donor is a NRE and gifted the amount out of his
foreign income to the assessee, whereas, in the opinion of Pr.CIT, it was
incorrect because funds have been credited into the bank account of Mr.
Kumar Chimanlal Mehta on 07.05.2009 with the entry "Opera House Trade
Finance Mumbai" and the proceeds thereof were utilized for giving gift of Rs.
1,48,00,000/- to the assessee. The Pr. CIT held that the issue regarding the gift
of Rs. 1,48,00,000/- received by the assessee has not been properly
enquired/examined by the AO, The AO was required to verify the capacity
and creditworthiness of the donor, Mr Kumar Chimanlal Mehta and examine
(2021) ABC 129
the genuineness of transaction but the AO has not examined the gift with
regard to the identity, creditworthiness and genuineness of the gift, therefore,
the assessment is erroneous and prejudicial to the interest of the Revenue.
Before the Pr. CIT, the assessee submitted that he had received a gift of Rs.
1.48 crores from his maternal uncle Shri Kumar Chimanlal Mehta, a non-
resident living in UAE, the amounts were credited into the NRE account of
Shri Kumar Chimanlal Mehta and the same were used for giving the gift to
the assessee. The assessee also filed affidavit of Shri Kumar Chimanlal
Mehta, copies of NRE account of the uncle Mr Kumar Chimanlal Mehta and a
creditworthiness certificate issued by CA of Shri Kumar Chimanlal Mehta.
However, the Pr. CIT held that the AO is duty bound to enquire about all the
aspects of the gifts i.e. identity and capacity of the Donor and the genuineness
of the gifts during the assessment proceedings which the AO has not verified
during the assessment proceedings and has merely accepted the submissions
of the assessee. As per 2nd proviso to Section 56(2)(vii) of the Act, the value
of any sum of money/immovable property/movable property received without
consideration or for inadequate consideration is chargeable to income tax in
the assessment of the recipient under the head "income from other sources" in
case where an individual or a HUF receives, in any previous year, from any
person or persons if it is otherwise not proved. In this case, the A.O. failed to
verify the capacity of the donor whether he was capable of donating such
huge amount or not and also failed to examine the genuineness of transaction
of this gift. The Pr. CIT accordingly set aside the assessment order dated
08.03.2013 for examination of the gift of Rs. 1.48 crores and directed the AO
vide orders u/s 263 of the Act dated 25.03.2015 to examine all the aspects of
the gift as claimed by the assessee and reframe the assessment after giving
sufficient opportunity to the assessee of being heard.
5. Aggrieved by the orders dated 25.03.2015 passed by the Pr. CIT u/s 263
of the Act, the assessee is in further appeal before the Tribunal.
6. The Ld. Counsel for the assessee submitted that the case was selected for
scrutiny under CASS and assessment has been framed u/s 143(3) of the Act
vide orders dated 08.03.2013. The Ld. Counsel of the assessee submitted that
the assessee has received a gift of Rs. 1,48,00,000/- from his maternal uncle
Shri Kumar Chimianlal Mehta which fall under definition of 'relative' under
Section 56(2)(vii) of the Act and the amount is exempt from tax under the
Act. The Ld. Counsel of the assessee submitted that the Pr. CIT has not
arrived at any conclusion rather he is directing the AO to enquire and find out
the creditworthiness, capacity and genuineness about the donor and has
wrongly concluded that the assessment order of the AO is erroneous and
prejudicial to the interest of the revenue. Three show cause notices have been
issued by the Ld. Pr. CIT dated 12.02.2015, 26.02.2015 and 17.03.2015 which
are based upon the audit query which is not permissible in law. The Ld.
Counsel submitted that the donor is assessee's maternal uncle who is settled in
UAE and owns his own company there and have sufficient creditworthiness to
give gift to his nephew i.e. the assessee. The Ld. Counsel submitted that a
certificate from the CA in UAE of the maternal uncle Mr. Kumar Chimanlal
Mehta was also produced to establish that Mr. Kumar Chimanlal Mehta has
sufficient creditworthiness to give gift of Rs. 1,48,00,000/- to the assessee.
She submitted that in response to the audit query, the assessee also produced
before the AO, the documents like original passport, certified true copy of
passport of Shri Kumar Chimanlal Mehta, original copy of affidavit and
source of gift amount received into NRE account of Shri Kumar C. Mehta.
The ld. Counsel submitted that with reference to the audit query, the assessee
also produced the photocopy of ING Vysya Bank NRE account bank
statement of donor Shri Kumar Chimanlal Mehta, photocopy of Bank advise
of the remitting bank Mashreq Bank of Dubai and photocopy of Chartered
Accountant certificate of Donor Shri Kumar Chimanlal Mehta before the AO
to prove that Shri Kumar Chimanlal Mehta is the maternal uncle of the
assessee and to establish the identity and creditworthiness of the donor and
genuineness of the gift transaction. The Ld. Counsel of the assessee submitted
that an amount of US$ 299953.00 was received vide Inward Remittance
(Purchase) which is placed at paper book page 7 & 8 of the assessee's paper
book which showed that remittance has been received from UAE to the credit
of the NRE bank account of uncle Mr. Kumar Chimanlal Mehta of the
assessee with ING Vysya Bank which was further used for giving gift to the
assessee. The Ld. Counsel submitted that the remittance was received by ING
Vysya Bank Ltd., TFU Mumbai from Mashreq Bank of Dubai from the
account of assessee's maternal uncle Shri Kumar Chimanlal Mehta for further
credit to the account with ING Vysya Bank, Opera House Branch, Mumbai
and hence the contention of the Pr. CIT that the gifts are received not from
NRE account is not correct rather it was received from ING Vysya Bank Ltd.,
TFU Mumbai for further credit to the NRE account of Shri Kumar Chimanlal
Mehta which was further used for giving gift to the assessee. The ld. Counsel
submitted that the audit query raised by the audit team regarding this gift of
Rs. 1.48 crores was the basis, upon which the query was raised by the AO
which was duly replied by the assessee vide three letters dated 17.10.2013,
13.01.2014 and 19.03.2014 filed before the AO which are also placed at paper
book page No. 20 to 41, whereby all the details were duly submitted proving
relation between the assessee and the donor, which are PAN card of the
donor, passport of the donor, PAN card of the assessee's mother (as donor is
the brother of assessee's mother), passport of the assessee's mother, PAN card
of the assessee, passport of the assessee. She submitted that the copy of ING
Vysya Bank NRE account along with copy of advise of Mashreq Bank of
Dubai and CA certificate of Shri Kumar Chimanlal Mehta and notorised
affidavit of the donor were also submitted before the AO to establish the
identity and creditworthiness of the donor and the genuineness of the gift
transaction of Rs. 1,48,00,000/- . The ld. Counsel of the assessee submitted
that the first notice issued by Pr. CIT which is almost after one year the audit
query was raised by the AO The reply submitted before the AO in connection
with the query of the audit team was also duly submitted before the Pr. CIT,
(2021) ABC 131
hence, the Pr. CIT cannot make roving enquiry of the details after issue of
notice u/s 263 of the Act. The Pr. CIT himself is not clear whether the gift is
to be charged to tax u/s 56 or 68 of the Act and whether the order passed by
the A.O. is erroneous and prejudicial to the interest of Revenue. The ld.
Counsel for the assessee relied upon the decision of the Hon'ble Bombay High
Court in the case of CIT v. Gabriel India Ltd., (2016) 1 ITJ Online 948
(Bombay) : (1993) 203 ITR 108 : (1993) 114 CTR 81 : (1993) 71 Taxman 585
to contend that no roving enquiry can be made by the Revenue. The Ld.
Counsel also relied on the decision of Hon'ble Delhi High Court in the case of
DIT v. Jyoti Foundation, (2016) 2 ITJ Online 783 (Delhi) : (2013) 357 ITR
388 : (2013) 219 Taxman 105 and in the case of Globus Infocom Ltd. v. CIT,
(2016) 2 ITJ Online 779 (Delhi) : (2014) 369 ITR 14 : (2014) 227 Taxman 48
to contend that the Pr. CIT has not reached any conclusion after going through
the documents on record and he cannot invoke the provisions of Section 263
of the Act. The ld. Counsel submitted that Section 263 of the Act cannot be
invoked based on the audit query and she relied upon the decision of Hon'ble
Punjab and Haryana High Court in the case of CIT v. Sohana Wollen
Mills, (2008) 296 ITR 238 (P&H). On being asked by the Bench about the
implication of Explanation 2 to Section 263 of the Act being now
incorporated in the statute, the Ld. Counsel submitted that it cannot be said
that the assessment order is passed without making any enquiry which is clear
from the assessment order. The Ld. Counsel submitted that the Pr. CIT cannot
superimpose on the AO and the Pr. CIT should have looked into the 'record'
as defined u/s 263 of the Act to come to conclusion whether the assessment is
erroneous and prejudicial to the interest of Revenue
7. The Ld. DR, on the other hand, strongly supported the orders of Pr. CIT
and contended that the AO has not made proper enquiry and verification
regarding the gift of Rs. 1,48,00,000/- received by the assessee from his
maternal uncle, Mr Kumar Chimanlal Mehta and the AO has merely accepted
the documents filed by the assessee before finalizing the assessment orders
dated 08.03.2013 passed u/s 143(3) of the Act and hence the Pr. CIT has
rightly invoked provisions of Section 263 of the Act.
8. We have heard the rival contentions and perused the material available
on record including the case laws relied upon. We have observed that the case
of the assessee was selected for scrutiny under CASS and assessment has
been framed u/s 143(3) of the Act vide assessment orders dated 08.03.2013.
As per AIR information, the assessee had, inter alia, made investment in
mutual funds to the tune of Rs. 1.57 crores in May 2009 which is stated to be
made out of gift of Rs. 1.48 crores received by the assessee from his maternal
uncle Shri Kumar Chimanlal Mehta vide Cheque No. 221429 dated 8 th May,
2009. We have observed that the assessee has filed an affidavit dated
30.12.2010 during course of assessment proceedings executed by his maternal
uncle Shri Kumar Chimanlal Mehta, the donor whereby he stated that he has
made the gift to his nephew i.e. the assessee of Rs. 1.48 crores on 08.05.2009,
out of natural love and affection. As per facts emerging from records, the AO
has accepted the gift of Rs. 1,48,00,000/- received by the assessee on
08.05.2009 from his maternal uncle, Mr. Kumar Chimanlal Mehta without
making any further enquiry or verification regarding the identity and
creditworthiness of the donor & the genuineness of the gift which is the
mandate of Section 68 of the Act and has merely accepted the submissions
made by the assessee with respect to gift of Rs. 1,48,00,000/- received by the
assessee from his maternal uncle Mr. Kumar Chimanlal Mehta.
The audit query was raised by the audit team that the AO has accepted this
gift of Rs. 1.48 crores without making any verification/investigation before
passing the assessment order dated 08-03-2013 u/s 143(3) of the Act. The AO
based on audit query raised post conclusion of the assessment, in turn asked
the assessee to explain the gifts of Rs. 1,48,00,000/- received by the assessee
from his maternal uncle on 08.05.2009, the assessee gave the reply before the
AO with respect to the audit query vide his three letters dated 17.10.2013,
13.01.2014 and 19.03.2014 whereby the assessee submitted all the details
with regard to the gift such as PAN card of the donor, passport of the donor,
PAN card of the assessee's mother, passport of the assessee's mother (the
donor is stated to be brother of assessee's mother), PAN card of the assessee,
passport of the assessee and photocopy of the notarized gift
declaration/affidavit, copy of the ING Vysya Bank NRE account bank
statement, bank advice for inward remittance transaction dated 07.05.2009
issued by ING Vysya Bank for inward remittance of US $ 299953 along with
copy of Mashreq Bank of Dubai and the CA certificate of Shri Kumar C.
Mehta. These replies are placed in paper book filed by the assessee before the
Tribunal.
The Pr. CIT has invoked the provisions of Section 263 of the Act and issued
four notices dated 14.01.2015, 12.02.2015, 26.02.2015 and 17.03.2015. The
assessee duly submitted the details in response to proceedings u/s 263 of the
Act initiated by the Pr. CIT, with respect to the gift, which are placed in paper
book filed before the Tribunal, to establish the identity and creditworthiness
of the donor and the genuineness of the gift transaction to establish that the
gift is genuine such as bank statement of the donor, affidavit of the donor, CA
Certificate of his maternal uncle Mr Kumar Chimanlal Mehta, the donor to
establish his creditworthiness, passport of the donor, PAN of the donor, PAN
and passport of mother of the assessee ( the donor is stated to be brother of
assessee's mother). The Pr. CIT passed an order u/s 263 of the Act dated
25.03.2015 directing the A.O. to verify all the aspects of the gift of Rs.
1,48,00,000/- received on 08.05.2009 by the assessee from his maternal uncle,
Mr. Kumar Chimanlal Mehta as the same were not verified by the AO while
passing assessment orders u/s 143(3) of the Act .
9. We have observed that w.e.f. Ist June, 2015 by Finance Bill 2015,
Explanation 2 to Section 263 was inserted to declare the law which reads as
under:–
(2021) ABC 133
“[Explanation 2. - For the purposes of this section, it is hereby declared that
an order passed by the Assessing Officer shall be deemed to be erroneous in
so far as it is prejudicial to the interests of the revenue, if, in the opinion of the
Principal Commissioner or Commissioner,–
(a) the order is passed without making inquiries or verification which should
have been made;
(b) the order is passed allowing any relief without inquiring into the claim;
(c) the order has not been made in accordance with any order, direction or
instruction issued by the Board under Section 119; or
(d) the order has not been passed in accordance with any decision which is
prejudicial to the assessee, rendered by the jurisdictional High Court or
Supreme Court in the case of the assessee or any other person.”]
We would like to refer at this stage to the meaning of 'Explanation' as inserted
in the Act whereby the Hon'ble Supreme Court in the case of Sundaram
Pillai v. Pattabiram, (1985) 1 SCC 591, whereby Fazal Ali, J culled out from
earlier cases the following as objects of an explanation to a statutory provision
(Reference Page 214-215, Principles of Statutory Interpretation by Justice
G.P. Singh, 13th Ed.):–
(a) To explain the meaning and intendment of the Act itself ,
(b) Where there is any obscurity or vagueness in the main enactment to
clarify the same so as to make it consistent with the dominant object
which it seems to subserve,
(c) To provide an additional support to dominant object of the Act in order
to make it meaningful and purposeful,
(d) an Explanation cannot in any way interfere with or change the enactment
or any part thereof but where some gap is left which is relevant for the
purpose of the Explanation, in order to suppress the mischief and
advance the object of the Act if it can help or assist the Court in
interpreting the true purport and intendment of the enactment, and
(e) It cannot, however, take away a statutory right with which any person
under a statute has been clothed or set at naught the working of an Act by
becoming an hindrance in the interpretation of the same. It is profitable
at this stage to refer to the Memorandum to Finance Bill 2015 and notes
to clauses to Finance Bill, 2015 which are as under:
“Memorandum to Finance Bill 2015
Revision of order that is erroneous in so far as it is prejudicial to the interests
of revenue
The existing provisions contained in sub-section (1) of Section 263 of the
Income- tax Act provides that if the Principal Commissioner or Commissioner
considers that any order passed by the assessing officer is erroneous in so far
as it is prejudicial to the interests of the Revenue, he may, after giving the
assessee an opportunity of being heard and after making an enquiry pass an
order modifying the assessment made by the assessing officer or cancelling
the assessment and directing fresh assessment.
The interpretation of expression "erroneous in so far as it is prejudicial to the
interests of the revenue" has been a contentious one.
In order to provide clarity on the issue it is proposed to provide that an order
passed by the Assessing Officer shall be deemed to be erroneous in so far as it
is prejudicial to the interests of the revenue, if, in the opinion of the Principal
Commissioner or Commissioner,–
(a) the order is passed without making inquiries or verification which,
should have been made;
(b) the order is passed allowing any relief without inquiring into the claim;
(c) the order has not been made in accordance with any order, direction or
instruction issued by the Board under Section 119; or
(d) the order has not been passed in accordance with any decision,
Supreme Court in the case of the assessee or any other person. This
amendment will take effect from 1st day of June, 2015.”
“Notes on Clauses Finance Bill 2015
Clause 65 of the Bill seeks to amend Section 263 of the Income Tax Act
relating to revision of orders prejudicial to revenue.
The existing provisions contained in sub-section (1) of Section 263
provide that if the Principal Commissioner or Commissioner considers
that any order passed by the assessing officer is erroneous in so far as it
is prejudicial to the interest of revenue, he may, after giving the assessee
an opportunity of being heard and after making or causing to be made an
enquiry, as he deems necessary, pass an order modifying the assessment
made by the assessing officer or cancelling the assessment and directing
fresh assessment.
It is proposed to amend sub-section (1) of the aforesaid section to insert
an Explanation so as to provide that an order passed by the Assessing
Officer shall be deemed to be erroneous in so far as it is prejudicial to the
interests of the revenue, if, in the opinion of the Principal Commissioner
or Commissioner,-
(b) the order is passed allowing any relief without inquiring into the
claim;
(c) the order has not been made in accordance with any order, direction
or instruction issued by the Board under Section 119; or
(d) the order has not been passed in accordance with any decision
which is prejudicial to the assessee, rendered by the jurisdictional
(2021) ABC 135
High Court or Supreme Court in the case of the assessee or any
other person. This amendment will take effect from 1st June, 2015.”
10. Now, as can be seen above, the amendment to Section 263 of the Act by
insertion of Explanation 2 to Section 263 is declaratory in nature and is
inserted to provide clarity on the issue as to which orders passed by the AO
shall constitute erroneous and prejudicial to the interest of Revenue whereby
it is provided, inter-alia, that if the order is passed without making inquiries or
verification by the AO which, should have been made or the order is passed
allowing any relief without inquiring into the claim; the order shall be deemed
to be erroneous and prejudicial to the interest of Revenue. The Hon'ble
Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT, (2018) 5
ITJ Online 298 (SC) : (2000) 243 ITR 83 : (2000) 159 CTR 1 : (2000) 109
Taxman 66 : (2016) 28 ITJ 133 held that if the AO has accepted the entry in
the statement of account filed by the taxpayer without making enquiry, the
said order of the AO shall be deemed to be erroneous and prejudicial to the
interest of the Revenue. It is now established principle that with respect to
cash credit appearing in the books of the assessee, the assessee has to
establish three ingredients i.e. identity and creditworthiness of the creditor and
the genuineness of the transaction as appearing in the books of account as per
mandate of section 68 of the Act which is a primary onus caste by law on the
assessee.
11. In this instant appeal, during the course of the assessment proceedings,
the assessee has submitted an affidavit dated 30.12.2010 of the donor to
establish the identity and creditworthiness of the donor and to prove the
genuineness of the gift and the AO merely accepted the same without making
any further enquiry or verification. In our considered opinion, the facts of the
case of the assessee is similar to the facts in the case of Malabar Industrial
Co. Ltd. (supra) whereby no enquiry/verification is made by the AO while
submissions of the assessee were simply accepted. Moreover, now
Explanation 2 to Section 263 of the Act is inserted in the statute which is
declaratory in nature to provide clarity on the issue whereby if the AO failed
to make any enquiry or necessary verification which should have been made,
the order becomes erroneous and prejudicial to the interest of revenue.
A proviso added from 01.04.1988 to Section 43B of the Act from 01.04.1984
came up for consideration in Allied Motors (P.) Ltd. v. CIT, (2019) 7 ITJ
Online 166 (SC) : (2019) 18 STD 372 (1997) 224 ITR 677: 91 Taxman 205
before Hon'ble Supreme Court and it was given retrospective effect from the
inception of the section on the reasoning that the proviso was added to remedy
unintended consequences and supply an obvious omission so that the section
may be given a reasonable interpretation and that in fact the amendment to
insert the proviso would not serve its object unless it is construed as
retrospective . In CIT v. Podar Cement (P.) Ltd,(2016) 1 ITJ Online 956 (SC)
: (1997) 226 ITR 625 : (1997) 141 CTR 67 : (1997) 92 Taxman 541, the
Hon'ble Supreme Court held that amendment introduced by the Finance Act,
1987 in so far the related to Section 27(iii), (iiia) and (iiib) which redefined
the expression 'owner of house property', in respect of which there was a
sharp divergence of opinion amongst the High Courts, was clarificatory and
declaratory in nature and consequently retrospective. Similarly, in Brij Mohan
Das Laxman Das v. CIT, (2016) 2 ITJ Online 763 (SC) : (1997) 223 ITR
825 : (1997) 138 CTR 214 : (1997) 90 Taxman 41, explanation 2 added to
section 40 of the Act was held to be declaratory in nature and, therefore,
retrospective.(Reference Page 569-570, Principles of Statutory Interpretation
by Justice G.P. Singh ,13th Ed.).
Regarding the contention of the assessee that the Pr. CIT is not clear about the
Section 68 or Section 56 of the Act to be invoked, whereby the income is to
be brought to tax from other sources and in case the assesse has received any
sum from the close relatives, Section 56 of the Act grants exemption for
bringing into tax such income under the head income from other sources. But,
however, Section 68 of the Act contemplates that with respect to any credit in
the books, it is an obligation cast upon the assessee to explain the credit as
appearing in the books of the assessee to the satisfaction of the AO by
establishing the identity and creditworthiness of the creditors and genuineness
of the transaction. This initial and primary burden is cast upon the assessee u/s
68 of the Act to establish the identity and creditworthiness of the donor and to
substantiate that the transaction is genuine. Thus, both the sections viz.
Section 56 and 68 of the Act operate in different field whereas Section 56 of
the Act deals with computation of the income of the tax payer under the head
'Income from other sources' which provides relief in case of receipts from
close relatives as defined u/s 56 of the Act while Section 68 of the Act is
placed under Chapter VI of the Act which deals with 'Aggregation of income
and set off or carry forward of loss' and Section 68 of the Act cast primary
onus on the assessee to explain nature and source of cash credit as appearing
in the books of the assessee to the satisfaction of the AO and failure to explain
the cash credit to the satisfaction of the AO shall lead to computation of
income from undisclosed sources under the head 'Income from other sources'.
Thus, in our considered view based on the facts as emanating from the
records, the AO has not made any enquiry or verification before accepting the
gift of Rs. 1.48 crores received by the assessee from his maternal uncle, Mr
Chimanlal Mehta and has merely accepted the submissions of the assessee
with respect to receipt of said gift and the Pr. CIT has rightly invoked the
provisions of Section 263 of the Act directing the AO to make proper enquiry
and reframe the assessment. The case laws relied upon by the assessee are not
applicable in this case as in the instant appeal, the AO has not made any
inquiries or verification which should have been made to satisfy the
ingredients of Section 68 of the Act and has merely accepted the submissions
of the assessee with respect to the gift of Rs. 1,48,00,000/- received by the
assessee from his maternal uncle . The assessee has mainly relied upon the
following case laws which are discussed below and are clearly
distinguishable:–
(2021) ABC 137
(a) Sohana Woollen Mills Ltd. case (supra) - It was held by the Hon'ble
Punjab and Haryana High Court that mere audit objection and if a
different view is possible are not enough to say that the order of the AO
is erroneous and prejudicial to the interest of revenue. The Hon'ble High
Court held that no rigid rule can be laid down about the situation when
the jurisdiction can be exercised and it is to be decided having regard to a
given fact situation. In the instant case under appeal before us, the AO
has not carried out any enquiry or verification with respect to the
submissions made by the assessee with respect to gift of Rs.
1,48,00,000/- received by the assessee from his uncle Mr. Kumar
Chimanlal Mehta and the AO merely accepted the submissions of the
assessee and hence there is no question of having a different view by
audit team than that of the AO.
(b) Globus Infocom Ltd.'s case (supra) - In this case the AO has
specifically gone into and examined the apportionment of common
expenses, who was fully satisfied with the apportionment made while the
CIT, instead of commenting upon or giving a final finding whether or not
the apportionment was acceptable, observed that it was possible that
there was an attempt to inflate expenses on trading activity and an
attempt might have been made to reduce the actual expenses of the
exempt unit. The use of the word 'possible' would indicate that there was
no finding or adjudication by the CIT and his observation was based on
mere suspicion and uncertain and yet a direction was issued to the AO to
carry out fresh inquiries to do the exercise once again and decipher
whether the actual expenses relatable to the manufacturing and trading
activities were correctly separated. Thus, the CIT was unsure whether or
not the bifurcation were right or wrong and hence it was held that it
could not be said that the orders of the AO was erroneous. While in the
instant case, there is no enquiry or verification conducted by the AO with
respect to submissions made by the assessee with respect to gift of Rs.
1,48,00,000/- received by the assessee from his uncle Mr. Kumar
Chimanlal Mehta and the AO merely accepted the submissions of the
assessee.
(c) Jyoti Foundation's case (supra) - It was held by Hon'ble Delhi High
Court that orders which are passed without inquiry or investigation are
treated as erroneous and prejudicial to the interest of the Revenue, but
the orders which are passed after inquiry/investigation are treated on
question /issue are not per-se or normally treated as erroneous and
prejudicial to the interest of the Revenue because the revisionary
authority feels and opines that further inquiry/investigation was required
or deeper or further scrutiny should be undertaken. In case where there is
inadequate enquiry but not lack of enquiry, the CIT must record a finding
that the order/inquiry made is erroneous. While in the instant case, the
AO has merely accepted the submissions made by the assessee with
respect to gift of Rs. 1,48,00,000/- received by the assessee from his
uncle Mr. Kumar Chimanlal Mehta and no enquiry or verification was
conducted by the AO.
(d) Gabriel India Ltd.'s case (supra) - It was held by Hon'ble Bombay
High Court that the power of suo motu revision u/s 263 of the Act is in
the nature of supervisory jurisdiction and can be exercised only if the
circumstances specified therein exists i.e. the order is erroneous and
being erroneous, prejudice is caused to the interest of the Revenue. If an
AO acting in accordance with law makes certain assessment, the same
cannot be branded as erroneous by the CIT simply because, according to
him, the order should have been written more elaborately. The Section
263 of the Act does not visualize a case of substitution of judgment of
CIT for that of the AO or allowing the CIT to make fishing or roving
enquiries in the matters which are concluded. While in the instant case
under appeal, the AO has merely accepted the submissions made by the
assessee with respect to gift of Rs. 1,48,00,000/- received by the assessee
from his uncle Mr. Kumar Chimanlal Mehta without any enquiry and
verification and there is no question of substitution of the opinion of the
CIT with that of the AO or the CIT making any fishing or roving enquiry
by passing orders u/s 263 of the Act dated 25.03.2015, hence this case is
clearly distinguishable.
Based on our above discussions and reasoning, We uphold the orders
dated 25.03.2015 of the Pr. CIT invoking Section 263 of the Act by
directing AO to re-decide the issue with respect to claim of the receipt of
gift of Rs. 1,48,00,000/- by the assessee . We order accordingly.
12. In the result, the appeal filed by the assessee is dismissed.
_____________
(2018) 5 ITJ Online 683 (Rajasthan)

In the High Court of Rajasthan
Sukhdeo Charity Estate
v.
Income Tax Officer
Shri A.K. Mathur, J.
S.B. Civil Writ Petition No. 504 of 1981
20th May, 1991
Escape Assessment-S.147 of Income Tax Act,1961-Notice U/s. 143 of
Income Tax Act,1961-Main Grievance of escape of income from assessment
for the year 1964-65 as the petitioner has disclosed all the facts and the same
were noted by the Income Tax Officer including the receipt of Rs. 70,000/-
received by the petitioner-trust from the Calcutta trust-Held-The principles
enunciated in the various cases referred to above, when applied to the present
case, leave no room for debate that the intention of the donor-trust as well as
(2021) ABC 139
the donee-trust was to treat the money as capital to be spent for the Ladnu
Water Supply Scheme. It is of no significance whether the amount had since
been paid to the State Government or kept in the account of the above-
referred scheme by the assessee-trust. From whatever angle it may be seen,
the deposited amount cannot be said to be income in the hands of the recipient
trust
-That on the facts and circumstances of the case, the Tribunal was not right in
holding that the sum of rupees one lakh received by the assessee-trust from
the Calcutta trust was liable to be included as part of the income of the
assessee-trust under the provisions of Section 12(2) of the Act of 1961.
Final outcome – Writ petition Allowed

Relevant Provisions : S.143,147,148 of Income Tax Act,1961
Sukhdeo Charity Estate v. CIT, (1984) 149 ITR 470 (Raj.) [Refer Para 5]
Counsel :
– Kailash Chand Bhandari, for the Petitioner;
– D.S. Shishodia, for the Respondent.
Eqvivalent Citations : (1991) 192 ITR 615 (Rajasthan)
JUDGMENT
Shri A.K. Mathur, J. :
1. The petitioner by this writ petition has prayed that the notice under
Section 148 of the Income Tax Act, 1961, issued on February 17, 1981, may
be quashed and the respondent may further be restrained from taking any
proceedings in pursuance of the said notice.
2. The petitioner is a public religious trust constituted under a registered
trust deed dated May 21, 1953. This trust is also registered under Section 12A
of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), with the
Commissioner of Income Tax. The petitioner-trust applies its funds for public
and religious purposes in India and it maintains and runs hospitals, temples,
etc. The petitioner-trust has its head office at Ladnu, district Nagaur, and a
branch at Calcutta. The trust maintains regular books of account both for its
head office and the branch office. Ladnu is a small town in the district of
Nagaur in Rajasthan and it had no public water supply scheme. In 1961, a
public water supply scheme was mooted for the town of Ladnu by the
Government of Rajasthan. It was estimated to cost about Rs. 10 lakhs. The
State Government agreed to provide, water to the town if the public
contributed about Rs. 3 lakhs and the balance amount was to be borne by the
State Government. The petitioner-trust was interested in the scheme as it
would provide water facilities to the town situated in a desert area which was
one of the several charitable objects for which the trust was established. The
petitioner-trust opened a water supply scheme account in its books at Ladnu.
It transferred a sum of Rs. 33,138 to this account out of its funds. Similarly, in
the year 1963-64, it transferred a sum of Rs. 86,449.79/- to the above account
out of its own income making a total of Rs. 1,19,587/- at the close of the
accounting year and as opening balance in Samvat year 2020. Simultaneously,
the petitioner-trust invited generous contributions from the public amongst
others. It addressed a letter to Benjamine and Rehma Elias Memorial Trust at
Calcutta (referred to hereinafter as “the Calcutta trust”) to make a substantial
contribution to the water supply scheme. The Calcutta trust contributed a sum
of Rs. 70,000/- towards the water supply scheme. It issued a cheque for a sum
of Rs. 70,000/- dated March 31, 1964, in favour of the petitioner-trust drawn
on the Hongkong and Shanghai Banking Corporation. This cheque was
handed over to the Branch Office at Calcutta and the petitioner-trust credited
it in the water supply scheme account in the Calcutta branch. The Calcutta
branch issued a cheque for Rs. 1,85,000/- in favour of the Executive Engineer,
Government of Rajasthan. Corresponding entries were passed in the books at
the head office at Ladnu. The petitioner-trust used to regularly file its return
of income each year with the Income Tax Officer, Nagaur. For the accounting
period April 3, 1963, to April 19, 1964, the relevant Assessment Year being
1964-65, the petitioner filed its return of income with the Income Tax Officer,
Nagaur. Along with the return, the petitioner-trust filed copies of the income
and expenditure accounts and balance-sheets of both the head office and the
branch office at Calcutta. The Income Tax Officer was not satisfied and, in
order to verify the correctness and completeness of the return, he issued a
notice under Section 143(2) of the Act. The accountant of the trust and its
counsel attended and produced the books of account of the Ladnu and
Calcutta offices and all relevant vouchers and correspondence before him. It
is also submitted before him that the donation of a sum of Rs. 70,000/- made
by the Calcutta trust is not the income of the petitioner-trust. The Income Tax
Officer, after scrutiny of the record, adjourned the matter and, when the case
was taken up again, the Income Tax Officer, after detailed examination of the
donation of Rs. 70,000/- from Calcutta trust, came to the conclusion that it
could not be treated as income of the petitioner-trust. The Income Tax Officer
passed the assessment order accordingly on March 24, 1969. Thereafter, on
October 21, 1980, the Commissioner of Income Tax, Jodhpur, vide his letter
dated October 21, 1980, informed the petitioner that the Income Tax Officer,
Nagaur, has reported that the trust had received voluntary contribution of Rs.
70,000/- from another trust of Calcutta, namely, Benjamine and Rehma Elias
Memorial Trust, on March 31, 1964, which the petitioner failed to disclose in
the total income. It is further alleged that the Income Tax Officer had reason
to believe that, by reason of the failure to disclose truly and fully the above
material fact, income chargeable to tax has escaped assessment for the year
1964-65. The petitioner filed a reply to the above notice. Thereafter, the
(2021) ABC 141
Income Tax Officer issued a notice on February 17, 1981, under Section 148
of the Act for the Assessment Year 1964-65 intimating the petitioner that
income chargeable to tax has escaped assessment within the meaning of
Section 147 of the Act and calling upon the petitioner to file a fresh return.
The petitioner filed objections on March 16, 1981, stating that there was no
omission or failure on the part of the assessee to disclose fully and truly all the
material facts necessary for the assessment. All the material facts had been
disclosed and noted by the Income Tax officer and are on the record.
Thereafter, the Income Tax Officer passed the assessment order. Therefore,
the petitioner has challenged this notice issued under Section 148 of the Act
by filing the present writ petition.
3. The main grievance of the petitioner is that there is no question of escape
of income from assessment for the year 1964-65 as the petitioner has
disclosed all the facts and the same were noted by the Income Tax Officer
including the receipt of Rs. 70,000/- received by the petitioner-trust from the
Calcutta trust. Thus, it was submitted, the above notice is void ab initio.
4. A reply has been filed by the respondents and they have traversed this
ground.
5. Mr. Bhandari, learned counsel for the petitioner, has pointed out that this
question may not be necessary at this stage because, in a similar matter arising
out of the same trust for a sum of Rs. 1,00,000/- for the water supply scheme
at Ladnu, a notice was given and ultimately a reference was made by the
Tribunal to the High Court for the year 1965-66 and in which in a somewhat
identical situation, the High Court has taken the view in the case of the
petitioner-trust that the amount which has been received by the petitioner-trust
cannot be said to be taxable and could not be included as part of the
assessable income of the trust. Learned Counsel has relied upon the decision
given by this court in Sukhdeo Charity Estate v. CIT, (1984) 149 ITR 470
(Raj.). In this case, the question which was referred to the High Court reads as
under (at p. 471):
“Whether, on the facts and in the circumstances of the case, the Tribunal
was right in holding that a sum of Rs. 1,00,000/- received by the
assessee-trust from Benjamine and Rehman Elias Memorial Trust is
liable to be included as part of the income of the assessee-trust under the
provisions of Section 12(2) of the Act of 1961?”
6. In this case, ultimately, after reviewing all the case law on the subject,
this court came to the conclusion that this amount cannot be treated to be part
of the income of the petitioner-trust. It was held in the above case as under (at
page 486):
“The principles enunciated in the various cases referred to above, when
applied to the present case, leave no room for debate that the intention of
the donor-trust as well as the donee-trust was to treat the money as
capital to be spent for the Ladnu Water Supply Scheme. It is of no
significance whether the amount had since been paid to the State
Government or kept in the account of the above-referred scheme by the
assessee-trust. From whatever angle it may be seen, the deposited
amount cannot be said to be income in the hands of the recipient trust.
The conclusion, therefore, is that on the facts and circumstances of the
case, the Tribunal was not right in holding that the sum of rupees one
lakh received by the assessee-trust from the Calcutta trust was liable to
be included as part of the income of the assessee-trust under the
provisions of Section 12(2) of the Act of 1961.
We, therefore, answer the question referred to us in the negative, i.e., in
favour of the assessee and against the Revenue. The costs are made
easy.”
7. Now, the same principle is applicable in the present case also. But the
difference is that it is for the year 1964-65 and the aforesaid case was for the
year 1965-66. Therefore, the same principle which has been laid down in the
aforesaid case is equally applicable in the present case. Instead of going into
detailed facts, suffice it to say that the ratio laid down in the above-mentioned
case is squarely applicable in the present case also. More so because, the
above case is between the same parties and it is also in respect of the same
scheme.
8. In these circumstances, I allow the writ petition and quash the notice
dated March 17, 1981, issued under Section 148 of the Act.
_____________
(2018) 5 ITJ Online 684 (Ahmedabad)
In the ITAT of Ahmedabad Bench 'B'
Torrent Pharmaceuticals Ltd.
v.
Dy. Commissioner of Income Tax
Shri Pradip Kumar Kedia, AM and Shri Mahavir Prasad , JM.
ITA No. 164 (Ahd.) of 2018
8th August, 2018
Revisional Jurisdiction Exercised by the Commissioner-U/s. 263 of Income
Tax Act,1961-Appeal before ITAT against the order of the Commissioner-
Being prejudiced to the Revenue-Scrutiny Assessment U/s. 143(3) of Income
Tax Act,1961-Original Assessment-The relevant facts in brief are that the
return of the assessee was subjected to scrutiny assessment for AY 2014-15
and the assessment was completed by the AO under Sec. 143(3) of the
Act vide order dated 26.12.2016 whereby the total income of the assessee was
assessed at Rs. 715.01 Crores as against the returned income of Rs. 584.13
Crores. Thereafter, the Pr.CIT in exercise of his revisionary power, issued
show cause notice dated 18.08.2017 under Sec.263 of the Act requiring the
assessee to show cause as to why assessment so framed u/s. 143(3) is not
liable to be set aside or modified. It was alleged by the Pr.CIT that the
(2021) ABC 143
examination of records revealed that the assessment order so passed is

erroneous insofar as it is prejudicial to the interest of the Revenue for the
reasons that the AO has failed to make adequate inquiries in respect of various
issues discussed in the show cause notice and the assessment order was
allegedly passed without due application of mind-Held-Supervisory
jurisdiction vested under Section 263 of the Act enables the concerned
Pr.CIT/CIT to review the records of any proceedings and order passed therein
by the AO. It empowers the Revisional Commissioner concerned to call for
and examine the records of another proceeding under the Act and if he
considers that any order passed therein by the AO is erroneous insofar as it is
prejudicial to the interest of the Revenue, then he may (after giving the
assessee an opportunity of being heard and after making or causing to be
made such inquiry as he deems necessary), pass such order thereon as the
circumstances of the case justify, including the order enhancing or modifying
the assessment or cancelling the assessment and directing afresh assessment.
Thus, the revisional powers conferred on the Pr.CIT/CIT under Section 263 of
the Act are of very wide amplitude with a view to address the revenue risks
which are objectively justifiable
-That it is the case of the assessee that the AO has recorded a conscious
finding after considering the factual matrix in the given context and in the
light of prevailing legal position and having regard to the past history of the
case on each and every issue raised by Pr.CIT. We notice that the assessment
so framed has run into more than 100 pages and has resulted in approximate
additions/disallowances of whopping Rs. 131 Crore. All the issues raised by
the Pr.CIT has been duly touched and certain adjustments have been already
carried out by the AO. Besides, the assessee is a Public Limited Company
listed on the Stock Exchanges and is reckoned to be a valuable company in
the pharmaceutical sector stated to be run by a dedicated team of professional
management. The assessment of the assessee is carried out on a year to year
basis. Having regard to the staggering turnover and scale of operation, it is
virtually impossible for any adjudicating authority to examine and re-examine
all the points in a given assessment year to the hilt as perceived by the Pr.CIT.
The assessee has filed its detailed counter before the Pr.CIT to address the
issues raised in the show cause notice. The Pr.CIT has not given any cogent
rebuttal in its order as to how the so called inadequacies in the enquiries made
has dented the ultimate outcome in assessment order. The action of the
Revisional Commissioner requires to be objectively justifiable and cannot be
a mere ipse dixit. The Pr.CIT ought to have made some elementary inquiry
himself to unearth alleged error in the order of the AO which caused prejudice
to the Revenue. Instead, the Pr.CIT has merely alleged absence of fuller
inquiry and non-application of mind without showing any systematic efforts
on his part to support the allegations. We are of the firm view that the Pr.CIT
was expected to do more in the totality of the facts and context. Thus, it is
difficult to agree with the allegation of the Pr.CIT on any of the issues raised
in the show cause notice and the revisional Order.

-The Revisional Commissioner is expected show that the view taken by the
AO is wholly unsustainable in law before embarking upon exercise of
revisionary powers. The revisional powers cannot be exercised for directing a
fuller inquiry to merely find out if the earlier view taken is erroneous
particularly when a view was already taken after inquiry. If such course of
action as interpreted by the Revisional Commissioner in the light of
the Explanation 2 is permitted, Revisional Commissioner can possibly find
fault with each and every assessment order without himself making any
inquiry or verification and without establishing that assessment order is not
sustainable in law. This would inevitably mean that every order of the lower
authority would thus become susceptible to Section 263 of the Act and, in
turn, will cause serious unintended hardship to the tax payer concerned for no
fault on his part. Apparently, this is not intended by the Explanation.
Howsoever wide the scope of Explanation 2(a) may be, its limits are implicit
in it. It is only in a very gross case of inadequacy in inquiry or where inquiry
is per se mandated on the basis of record available before the AO and such
inquiry was not conducted, the revisional power so conferred can be exercised
to invalidate the action of AO. The AO in the present case has not accepted
the submissions of the assessee on various issues summarily but has shown
appetite for inquiry and verifications. The AO has passed the order in great
detail after making several allowances and disallowances on the issues
involved impliedly after due application of mind. Therefore,
the Explanation 2 to Section 263 of the Act do not, in our view, thwart the
assessment process in the facts and the context of the case. Consequently, we
find that the foundation for exercise of revisional jurisdiction is sorely
missing in the present case.
Final outcome –Appeal Allowed

CIT v. Arvind Jwellers, (2003) 259 ITR 502 (Guj.) : (2002) 124 Taxman 615
[Refer Para 6.9]
CIT v. R.K. Construction Co., (2016) 1 ITJ Online 957 (Guj) : (2009) 313
ITR 65 : (2009) 221 CTR 415 : (2008) 175 Taxman 165 [Refer Para 6.8]
Narayan Tatu Rane v. ITO, (2016) 2 ITJ Online 785 (Trib. - Mumbai)
[Refer Para 6.8]
Counsel :
– Vartik Choksi, AR, for the Appellant;
– Surendra Kumar, CIT, DR, for the Respondent.
(2021) ABC 145
Eqvivalent Citations : (2018) 173 ITD 130 (Ahmedabad - Trib.)
ORDER
Shri Pradip Kumar Kedia, AM. :
1. The captioned appeal has been filed at the instance of the Assessee
against the order of the Principal Commissioner of Income Tax-4,
Ahmedabad ('Pr.CIT' in short), dated 15.11.2017 wherein order passed by the
Assessing Officer (AO) under Sec. 143(3) of the Income Tax Act, 1961 (the
Act) dated 26.12.2016 concerning Assessment Year 2014-15 was held to be
erroneous insofar as the prejudicial to the interest of the Revenue within the
meaning of Section 263 of the Act and thus set aside.
2. The grounds of appeal raised by the Assessee reads as under:–
“1. On the facts and in the circumstances of the case, the order passed by
the Learned Pr. C.I.T. u/s. 263 of the I.T. Act is ab initio void being bad
in law.
2. On the facts and in the circumstances of the case, the Learned Pr. CIT
erred in setting aside the assessment order dated 26th December, 2016
and directing the Assessing Officer to pass a fresh assessment order.”
3. The assessee, as per grounds of appeal, essentially challenges the
foundation of jurisdiction assumed by the Pr.CIT under Sec.263 of the Act
and contends that the subject assessment order framed under Sec. 143(3) of
the Act passed by the AO cannot be termed as erroneous and prejudicial to the
interest of the Revenue which is a condition precedent for usurption of
revisional jurisdiction.
4. The relevant facts in brief are that the return of the assessee was
subjected to scrutiny assessment for AY 2014-15 and the assessment was
completed by the AO under Sec. 143(3) of the Act vide order dated
26.12.2016 whereby the total income of the assessee was assessed at Rs.
715.01 Crores as against the returned income of Rs. 584.13 Crores.
Thereafter, the Pr.CIT in exercise of his revisionary power, issued show cause
notice dated 18.08.2017 under Sec.263 of the Act requiring the assessee to
show cause as to why assessment so framed u/s. 143(3) is not liable to be set
aside or modified. It was alleged by the Pr.CIT that the examination of
records revealed that the assessment order so passed is erroneous insofar as it
is prejudicial to the interest of the Revenue for the reasons that the AO has
failed to make adequate inquiries in respect of various issues discussed in the
show cause notice and the assessment order was allegedly passed without due
application of mind. The show cause notice issued by the Pr.CIT under
Sec.263 (supra) is reproduced hereunder for the sake of ready reference:
“You have debited a total amount of Rs. 55.14 cr. On account of business
advancement expenses, which have been allegedly incurred on gifts
items distributed to various persons. Out of this Rs. 55.14 cr., you have
incurred an expenditure of Rs. 24.32 cr. On gift items exceeding Rs.
1000/- each. On perusal of the records, it is seen that the AO has not
made any enquiry as regards to whom such gift items were distributed
and what was the record maintained. The AO has also not enquired as to
the proof/evidence of such distribution made to various stake holders.
Non enquiry in the matter has rendered the impugned order erroneous
and prejudicial to the interest of revenue.
(ii) You have shown a turnover of Rs. 52,126.83 lakh from your Baddi
unit and shown a profit of Rs. 12,296.55 lakh. The AO has failed to
apply his mind to the issue and has also failed to make any meaningful
enquiry as to what kind of medicines were being manufactured there;
whether it was API or whether it was formulation; from where did this
plant get the chemistry of molecules if API has been manufactured? If
the said unit was FDA/other regulatory authorities approved? And, if yes,
who incurred expenses for such approvals? Whether Baddi unit was
manufacturing generic medicines or branded generics? If branded,
whether these were old brands belonging to the company? What kind of
expenses had been incurred on account of business advancement (in
India & abroad) and other related expenses. What amount of expenditure
was debited to Baddi unit on account of salary/remuneration paid to the
higher management and other administrative expenses? If the medicines
were exported, what kind and how much of expenditure was incurred and
debited to the books of Baddi unit on account of export of such
formulations. Similar is the case with your Sikkim unit. Non-application
of mind in this matter by the AO has rendered the impugned order as
erroneous and prejudicial to the interest of revenue.
(iii) You have debited a total expenses of Rs. 137,41 crores on account of
R & D expenses on which a weighted deduction has been claimed. The
AO has not enquired as to whether separate expenses have been incurred
by you on account of quality control & regulatory approvals or whether
they have been grouped Into R & D expenses. Non-application of mind
in this matter by the AO has rendered the impugned order as erroneous
and prejudicial to the interest of revenue.
You have claimed an expenditure of Rs. 475,32 lakhs on account of
patent expenses/patent related expenses outside India as eligible for
weighted tax u/s. 35(2AB) of the I.T. Act, The explanation inserted under
Clause 1D to Sec.35(2AB) stated that;
Explanation - for the purposed of this clause, "Expenditure on scientific
research", in relation to drugs and pharmaceuticals, shall include
expenditure incurred on clinical drug trial, obtaining approval from any
regulatory authority under any Central, State or Provincial Act and filing
an application for a patent under the Patents Act, 1970 (39 of 1970).
Thus, the expenditure incurred in relation to patents not relating to the
Patent Act, 1970 would not be eligible for such deduction, A/on
application of mind in this matter by the AO has rendered the Impugned
order as erroneous and prejudicial to the interest of Revenue.
(2021) ABC 147
(iv) You have claimed an expenditure of Rs. 1214.01 lakhs on Clinical
Research. The AO has failed to apply his mind and not made any
enquiries in this regard as to the nature and details of the expenses
incurred - as to whom paid and for what purposes? He has also not
enquired if such clinical trials were made for the purpose of regulatory
approvals or for R & D work, which would have affected the deduction
available u/s. 35 (2AB) of the I.T. Act. A/on application of mind and
non-enquiry in this regard has rendered the impugned assessment order
erroneous and prejudicial to the interest of revenue.
(v) You have also claimed various expenses on account of labour and job
work charges, professional fees, legal expenses and other salary expenses
as part of R&D expenses. The AO has not made any meaningful enquiry
with respect to these expenses as to determine whether all such expenses
were related to R&D because of which the impugned order has been
rendered erroneous and prejudicial to the interest of revenue.
(vi) You have claimed expenses on academic/scientific get together of
Rs. 9.44 cr., sales promotion expenses of Rs. 19.57 crores, business
advancement expenses of Rs. 1.48 Cr. (other than on domestic). The AO
has not made any enquiry as regards the incurring of such expenses nor
has he applied his mind as to whether such or part of such expenses fell
foul of local regulations prevailing in those countries regarding
gifting/other payments/expenses incurred on doctors and medical
practitioners. Further, the AO, has also not examined if such expenses
incurred were rightfully belonging to the assessee-company and not its
foreign subsidiaries which were also engaged in marketing of
formulations in other countries. Non-application of mind and non-
enquiry in this regard has rendered the impugned assessment order
erroneous and prejudicial to the interest of the revenue.”
4.1 The controversy emerging from the show cause notice is broadly
summarized as under:
“(i) The assessee debited a sum of Rs. 55.14 crores on account of
"business advancement expenses" allegedly incurred on gift articles
distributed to various persons. The assessee was intimated that the
aforesaid amount included Rs. 24.32 crores on gift items exceeding Rs.
1000 each. The Learned Pr. CIT alleged that the Assessing Officer did
not make inquiry regarding the persons to whom gifts were given and the
record maintained for the same.
(ii) The assessee has shown turnover of Rs. 52126.83 lakhs from Baddi
unit yielding profit of Rs. 12296.55 lakhs and the Assessing Officer
failed to apply his mind to this issue and to make meaningful inquiry
regarding the manufacturing process, and goods being manufactured.
The learned Pr. CIT has alleged that similar is the position with regard to
Sikkim unit.
(iv) The assessee has debited expenditure of Rs. 137.41 crores for R &
D expenses on which weighted deduction has been claimed. He has
observed that the Assessing Officer has not inquired as to whether
separate expenses have been incurred on account of quality control and
regulatory approvals or whether these expenses are grouped under R & D
expenses. The learned Pr. CIT assumed that there was non-application of
mind on the part of the Assessing Officer on this issue.
(iv) The assessee has claimed Clinical Research expenditure of Rs.
1214.01 lakhs and the Assessing Officer did not apply his mind and did
not make inquiry regarding the nature and details of the expenses and the
purpose of the expenditure vis-a-vis deduction available u/s. 35(2AB) of
the Act.
(v) The assessee has claimed various expenses for labour, job-work,
professional fees, legal expenses and salary expenses as part of R & D
expenses and the Assessing Officer did not make any meaningful inquiry
with regard to these expenses.
(vi) The assessee claimed expenses of Rs. 9.44 crores on
academic/scientific get together, sales promotion expenses of Rs. 19.57
crores and business advancement expenses of Rs. 1.48 crores (other than
domestic expenses). The learned Pr. CIT assumed that the Assessing
Officer did not make inquiry regarding incurring of such expenses and
there was no application of mind as to whether any part of such
expenditure violated the regulations prevailing in those countries where
expenses were incurred.”
4.2 In response to show cause notice, the assessee filed a detailed reply dated
21.09.2017 to demonstrate that the allegations made in the show cause notice
has, in fact, been dealt with after making proper inquiries during the course of
assessment proceedings and a very lengthy assessment order running into 102
pages was passed by the AO in this regard. It was also pointed out that the
returned income was accompanied by the audited financial statements
together with all statutory annexures and notes. The books of account were
also produced before the AO in the course of the assessment proceedings. It
was further pointed out that the AO made various additions/disallowances of
substantial nature while accepting the remaining part after thorough scrutiny
and application of mind.
4.3 For better appreciation of the version of the assessee before the
Revisional Commissioner, the relevant part of the written reply dealing with
show cause notice is reproduced hereunder:
‘5.1 Regarding Business Advancement Expenses:
I. Vide para No. (i) of the above referred notice, your honour has
stated that non-inquiry by the Assessing Officer in the matter of Business
Advancement expenses has rendered the impugned order erroneous and
(2021) ABC 149
prejudicial to the interests of the Revenue. Relevant para of the said
notice is reproduced as under:
“(i). You have debited a total amount of Rs. 55,14 Cr. on account of
business advancement expenses, which have been allegedly incurred on
gifts items distributed to various persons. Out of this Rs. 55.14 Cr., you
have incurred on expenditure of Rs. 24.32 Cr. on gift items exceeding
Rs. 1,000/- each. On perusal of the records, it is seen that the AO has not
made any inquiry as regards to whom such gift items were distributed
and what was the record maintained. The AO has also not enquired as to
the proof/evidence of such distribution made to various stakeholders.
Non-inquiry in the matter has rendered the impugned order erroneous
and prejudicial to the interest of Revenue.”
II. In this connection, the assessee company submits following details
in respect of records available with the Assessing Officer, inquiries made
by him and replies/details submitted by the assessee company.
(a) Vide submission dated 17.06.2016 the assessee company submitted
copy of Audit Report. Based on the verification of the financial
statements, the Assessing Officer asked to provide break-up of Selling,
publicity and medical literature expenses amounting to Rs. 279.20 crores
as appearing in Note No. 21 "OTHER EXPENSES" of Profit & Loss
account along with explanation for nature of expenses.
In response to that the assessee company submitted the detailed breakup
of selling and Publicity expenses incurred for Domestic Market and other
than Domestic Market, detailed explanation for nature of such
expenditure along with break-up of Business Advancement expenses into
items costing more than Rs. 1000/- and those less than Rs. 1,000/- vide
submission dated 10.12.2016. Copy of the said reply is annexed herewith
vide Annexure-1(A).
(b) On the basis of verification and examination of details submitted
vide abovementioned submitted dated 10.12.2016. the assessee company
was asked to show cause as to why expenses accounted under the head of
Business Advancement Expenses and Doctors' Sponsorship, which are
grouped under Selling and Distribution Expenses, should not be
disallowed in view of the CBDT Circular No. 5/2012 dated 01-08-2012
which provides for disallowance of deduction pertaining to freebies
given to medical practitioners.
In response to that the assessee company submitted following details vide
submission dated, 15.12.2016, copy of which is annexed herewith vide
Annexure-1(b).
(i) Note on the nature of such expenses - Para 1.1 on page 1 and 1.2 on
page 4
(ii) Types of gift items given - Para 1.1 (b) on page 2
(iii) Category of various persons to whom such gift items are distributed
- Para 1.1(c) on page 2
(iv) How such gift items are distributed to various stakeholders by the
assessee company -Para 1.1(d) on page 3
(v) Explanation regarding maintaining records in respect of such
expenses - Para 1.1(d) on page 3; and
(vi) Justification for allowability of the said expenses viz-a-viz Circular
No. 5/2012 - Para 2 on page 4.
III. The hearings on the above matter were taken up by the Assessing
Officer on a number of occasions. Over and above the verification ledger
accounts, the Assessing Officer has also viewed certain invoices
and/bills, which were made available during the course of the
proceedings.
Based on such scrutiny of the aforesaid bills and records of the assessee
company and after detailed verification of the bills and invoices on
random check basis, the Assessing Officer has made disallowance of
10% of the entire expenses of Rs. 55.14 crores, after satisfying himself of
the fact that the expenses are incurred also for the persons other than
Doctors and medical professionals such as associates, business
associates, suppliers and such other professionals, etc. as already
discussed in the submissions made before the Assessing Officer.
IV. In this connection, it is also important to note that small items
costing below Rs. 1000/- in each case are also of substantial amount and
the balance of the total expenditure comes to Rs. 24.32 crores. Further, it
is submitted that the small items costing below Rs. 1000/- in each case,
given as a memento, would not be hit by the CBDT Circular No. 5/2012.
even if they are given to medical practitioners (as per MCI Regulation
amended by Notification dated 01.02.2016). Therefore, it can be said that
the Assessing Officer has made disallowance of Rs. 5,51,37,427/- out of
expenditure of Rs. 24.32 crores, being expenditure on items exceeding
Rs. 1000/- in each case.
Apart from above, the Assessing Officer has also made disallowance of
entire expenditure of Rs. 25,99,87,036/-, being expenses on
Academic/Scientific Grants to Doctors etc.
V. Therefore, the observation of your honour that the Assessing Officer
has not made any enquiry as regards to whom such gifts items were
distributed and what was the record maintained, or as to the
proof/evidence of such distribution made to various stakeholders, is,
apparently, on incorrect understanding of the facts.
The assessee company also submitted list of the items distributed along
with the break-up of items costing more than Rs. 1000 and less than that.
This indicates that adequate records have been maintained by the
(2021) ABC 151
assessee company, as to the expenditure incurred by it for the said
expense and on products distributed by it.
It was also explained that these items are not distributed on one to one
basis by the assessee company itself, rather these items are generally
handed over to the marketing staff and other employees of the company,
who in-tura distribute them to the respective persons whom they have
been directly interacting/dealing with. These items are distributed to the
following persons:
* Distributors,
* Wholesalers,
* Retailers,
* Commission Agents,
* Stockiest,
* Pharmacies,
* Employees,
* Professional consultants,
* Bankers,
* Other Financers,
* Lawyers,
* Permanent Suppliers,
* Hospitals, Doctors, others people connected with medical field,
* Independent Scientists and
* Scientific and Research Associations etc.
It is submitted that the assessee company maintains the records pertaining
to such expenses, however, it is not possible to maintain the list of the
persons to whom these items have been distributed by the marketing staff
and other employees of the company, especially considering the nature,
value and volume of such products.
VI. On the basis of above, it can be said that it is not a case that there is
non-enquiry on the part of the Assessing Officer in this matter as
observed by your honour, but the Assessing Officer has made in-depth
inquiries regarding the Business Advancement expenses, which was duly
replied by the assessee company during the course of assessment
proceedings. The Assessing Officer has also made certain disallowance
as mentioned in para 5.1(III) (supra) for this matter in his assessment
order at para 6 on page Nos. 20-21 .
Further, as stated above, the Assessing Officer has also made
disallowance of entire expenditure of Rs. 25,99,87,036/-. being expenses
on Academic/Scientific Grants to Doctors etc.
5.2 Regarding Business of Baddi and Sikkim Units:
I. Vide para No. (ii) of the above referred notice, your honour has
observed that the assessment order passed by the AO is erroneous and
prejudicial to the interest of Revenue by stating that AO has failed to
make meaningful inquiry as to:
- What kind of medicines being manufactured there (whether API or
formulations)
- Source of getting chemistry of molecules, if API is manufactured
- Source of formula/composition, if formulation is manufactured
- Whether the said units required approval from PDA/other regulatory
authorities and if yes, who incurred expenses for such approvals?
- Whether unit is manufacturing generic or branded medicines? If
branded, whether these old brands belong to company?
- Expenses incurred for business advancement (in India and abroad)
- Expenditure debited to Baddi and Sikkim unit for
salary/remuneration to higher management and administrative
expenses
- If medicines were exported, expenditure incurred and debited to the
books of Baddi and Sikkim unit for export of such formulations.
II. In this connection, the assessee company submits the following
details about the records available with Assessing Officer, inquiries made
by him and replies and details submitted by the assessee company:
(a) As per the provisions of Section 80-IC (7) and 80-IE(6) read with
Section 80-IA (7), every undertaking claiming deduction under the said
provisions is required to get its accounts audited by a Chartered
Accountant and furnish the report of such audit in Form No. 10CCB
along with the return of income.
The assessee company had maintained separate books of account of its
Baddi Unit and Sikkim Unit and the said books of account are audited by
a Chartered Accountant as required under the above provisions. The copy
of such reports along with the Profit and Loss Account and Balance sheet
of Baddi Unit and Sikkim Unit were also available with the Assessing
officer.
(b) Further, vide submission dated 17.06.2016, the assessee company
submitted copy of Acknowledgement of Return of income along with the
Statement of Total Income, wherein the claim made by the assessee
company u/s. 80-IC and 80-IE was verifiable.
(c) Basis of Allocation of expenses:
i. On the basis of verification of above documents/details as
mentioned in para 5.2(II)(a) & (b) and explanations provided during
the course of hearing, the Assessing Officer asked the assessee
company to provide the details regarding expenditure debited to
(2021) ABC 153
P&L account and the basis of allocation of expenses to Baddi and
Sikkim unit.
In this connection, the assessee company explained that all
Manufacturing & other direct expenses incurred for the Baddi and
Sikkim units have been accounted directly in Baddi and Sikkim
unit's books of account respectively and expenses which are
incurred in common for Baddi, Sikkim & other units of company
are allocated on the systematic basis as explained in the said
submission dated 10.12.2016, copy of which is annexed herewith
vide Annexure-2(a)
ii. On the basis of verification of the above submissions, Assessing
Officer further asked the assessee company to explain that:
♦ why the administrative expenses should not be allocated on the
basis of turnover ratio of Baddi & Sikkim Unit, instead of allocation
of such expenses made by the assessee company on the basis of
number of employees;
♦ why the donation should not be allocated to Baddi & Sikkim unit;
♦ to justify the basis of allocation of R & D expenses (Development
cost) to Baddi & Sikkim unit; and
♦ explain as to why the Discovery cost of R & D and Capital
expenditure on R & D are not allocated to Baddi and Sikkim units
In response to this, the assessee company submitted its detailed
explanation vide three replies filed on 13.12.2016 on each of the question
raised by the Assessing Officer. Copies of those replies are annexed
herewith vide Annexure-2(B)(i), 2(B)(ii) and 2(B)(iii).
(d) Claim for deduction u/s. 80-IC and 80-IE of the Act:
From the copy of Form 10CCB submitted by the assessee company, the
Assessing Officer verified the basic details, regarding eligibility of claim
u/s. 80-IC and 80-IE of the Act viz.
(a) location of the undertaking,
(b) commencement of commercial production,
(c) Articles manufactured or produced i.e. pharmaceutical products
(schedule XIV, part C, sr. No. 12) etc.
Thereafter, the AO asked the assessee company to provide the details of
other operating income of Baddi & Sikkim Unit and to explain its
eligibility for claim u/s. 80-IC and 80-IE of the Act respectively.
In response to the same the assessee company submitted explanation for
eligibility of claim on account of other operating income u/s. 80-IC and
80-IE of the Act. Copy of the said submissions dated 14.12.2016 and
15.12.2016 is attached herewith vide Annexure-2(C) & 2(D) respectively.
III. After considering the various submissions made by the assessee
company and on the basis of various points discussed during the course of
assessment proceedings, the Assessing Officer has in his assessment order
made following adjustments:
- Reallocated the expenditure in the nature of Administrative
expenses and there by reduced the amount eligible for the claim of
deduction u/s. 80-IE of the Act by an amount of Rs. 27,74,99,662/-,
(Since, the allocation made by the assessee company to Baddi unit
was higher than the amount worked out by Assessing Officer, no
adjustment was made to increase the amount eligible for claim of
deduction u/s. 80-IC of the Act) - para No. 19 at page Nos. 77-79 of
the assessment order;
- Rejected the allocation made by the assessee company in respect of
development cost related to R&D Center and reallocated the same
on the basis of total turnover ratio, thereby reduced the amount
eligible for claim of deduction u/s. 80-IC and u/s. 80-IE of the Act
by an amount of Rs. 1,01,69,860/- and Rs. 18,95,26,218/- for Baddi
& Sikkim unit respectively - para Nos. 15 & 16 at page No. 54-59
of the assessment order:
- Allocated the Capital expenditure and discovery cost of R&D
Centre to Baddi & Sikkim unit, rejecting the contention of the
assessee company that no such allocation should be made, thereby
reduced the amount eligible for claim of deduction u/s. 80-IC and
u/s. 80-IE of the Act by an amount of Rs. 17,83,57,712/- and Rs.
21,86,59,796/- for Baddi & Sikkim unit respectively - para Nos. 15
& 16 at page Nos. 54-59 of the assessment order:
- Reduced the amount eligible for deduction on account of other
operating income claimed by the assessee company u/s. 80-IC and
80-IE of the Act by amount of Rs. 6,97,68,075/- and Rs.30,81,029/-
respectively - para Nos. 9 & 22-23 at page Nos. 28-38 & 85-99 of
the assessment order:
- Reduced the claim of deduction u/s. 80G of the Act by Rs.
1,73,65,884/- and 80GGB of the Act by Rs. 1,90,25,206/- by
allocating the said donations to Baddi & Sikkim Unit - para No. 18
at page Nos. 73-77 of the assessment order.
The amount of expenses/donation allocated by the assessee company and
adjustment made by the Assessing Officer to expense and the other
income claimed by the assessee company u/s. 80-IC/80-IE and the
amount allowed by the Assessing Officer are summarized as under.
Particulars Disallowances made in Disallowances made in relation to
relation to Baddi Unit Sikkim Unit
Reallocation of administrative 27,74,99,662

(2021) ABC 155
expenses
Reallocation of Development Cost 1,01,69,860 18,95,26,218

of R&D
Allocation of Discovery cost of 13,48,79,464 16,53,57,112

R&D
Allocation of Capital exp. of R&D 4,34,78,248 5,33,02,684
Exclusion of other income from 6,97,68,075 30,81,029

eligible profit
Deduction claimed u/s. 80G out of 78,30,043 95,35,841

Donation allocated to eligible unit
Deduction claimed u/s. 80GGB out 85,78,209 1,04,46,997

of Donation allocated to eligible
unit
Total 27,47,03,899 70,87,49,543

On the basis of above table, it can be seen that the Assessing Officer has,
after thorough examination of all the records/details/information and
after in-depth verification of income and expenses, made disallowances
of Rs. 27,47,03,899/- in relation to Baddi unit, which eligible for
deduction u/s. 80-IC and Rs. 70,87,49,543/-, in relation to Sikkim unit,
which eligible for deduction u/s. 80-IE.
IV. On the basis of above, it can be said that it is not a case that there is
non-application of mind on the part of the Assessing Officer in this
matter as observed by your honour. On the other hand, there is active
application of mind and detailed disallowances.
(a) In this connection, the assessee company submits the Assessing
Officer had verified the details of nature of business activities carried out
by Baddi and Sikkim units of the assessee company from the details
discussed and various documents submitted during the course of
assessment proceedings viz. annual audit report of the company, audited
financials of respective units, Form 10CCB and Transfer Pricing
documentation etc.
(b) Further, in connection with the issues raised by your honour that the
Assessing Officer has not inquired as to what kind of medicines are
being manufactured at respective units, source of getting chemistry of
molecules if API is manufactured, source of formula/composition if
formula is manufactured, it is submitted that these details were discussed
during the course of assessment proceeding since years. Moreover,
details of products manufactured were also available in various audit
reports. Merely because the Assessing Officer has not discussed about
the same in his assessment order, will not make the said order erroneous.
The assessee company fails to understand that when the Assessing
Officer has examined all the income and expenditure as discussed in para
5.2(11), then what would be the impact which makes the assessment
order prejudicial to the interest of the revenue on the basis of answers to
above questions as raised by your honour in the show cause notice,
which are though already discussed during the course of hearing but
merely not mention in the assessment order.
(c) Further, the Assessing Officer has made in-depth inquiries regarding
the amount of expenditure debited to P&L account of Baddi & Sikkim
unit of the assessee company, the basis of allocation of various expenses
and amount claimed as deduction u/s. 80-IC and 80-IE of the Act.
Thereafter, not being satisfied by the replies of the assessee company, the
Assessing Officer has proceeded to modify the claim of deduction u/s.
80-IC & 80-IE of the Act on account of other operating incomes and
rejected the basis of allocation of expenses of the assessee company to
both the eligible units and allocated the expenditure as per his
calculations and made certain disallowance in this matter in his
assessment order at various para mentioned in point 5.2(111) supra.
On the basis of the above, the assessee company submits that the notice
u/s. 263 of the Act issued by your honour on this issue is devoid of any
merits as the order passed by Assessing Officer is not prejudicial to the
interest of revenue.
5.3 Regarding details of expenses on account of Quality Control &
Regulatory Approvals. Claim u/s. 35(2AB) for R&D expenses on
account of Patent or related expenses outside India. Clinical Research
Expenses and Other expenses (being labour, job work charges,
professional fees, legal expenses and other salary expenses)
I. Vide Para Nos. (iii), (iv) and (v) of the above referred notice, your
honour has considered the assessment order passed by the AO as
erroneous and prejudicial to the interest of Revenue stating as under:
“(iii) You have debited a total expenses of Rs. 137.41 crores on account
of R&D expenses on which a weighted deduction has been claimed. The
AO has not enquired as to whether separate expenses have been incurred
by you on account of quality control & regulatory approvals or whether
they have been grouped into R&D expenses. Non-application of mind in
this matter by the AO has rendered the impugned order as erroneous and
prejudicial to the interest of revenue.
You have claimed an expenditure of Rs. 475.32 lakhs on account of
patent expenses/patent related expenses outside India as eligible for
weighted tax u/s. 35(2AB) of IT. Act. The explanation inserted under
clause ID to Section 35(2AB) stated that:
(2021) ABC 157
Explanation.–For the purposes of this clause, "expenditure on scientific
research", in relation to drugs and pharmaceuticals, shall include
expenditure incurred on clinical drug trial, obtaining approval from any
regulatory authority under any Central State or Provincial Act and filing
an application for a patent under the Patents Act, 1970 (39 of 1970).
Thus the expenditure incurred in relation to patents not relating to the
Patent Act, 1970 would not be eligible for such deduction. Non-
application of mind in this matter by the AO has rendered the impugned
order as erroneous and prejudicial to the interest of revenue.
(iv) You have claimed an expenditure of Rs. 1214.01 lakhs on Clinical
research. The A.O. has failed to apply his mind and not made any
enquiries in this regard as to nature and details of expenses incurred - as
to whom paid and for what purpose? He has also not enquired if such
clinical trial were made for the purpose of regulatory approvals or for
R&D work which would have been affected the deduction available u/s.
35(2AB) of the IT. Act. Non-application of mind and non-inquiry in this
regard has rendered the impugned order as erroneous and prejudicial to
the interest of revenue.
(v) You have also claimed various expenses on account of labour and job
work charges, professional fees, legal expenses and other salary expenses
as part of R&D expenses. The AO has not made any meaningful inquiry
with respect to these expenses as to determine whether all such expenses
were related to R&D because of which the impugned order has been
rendered erroneous and prejudicial to the interest of revenue.”
II. In this connection, the assessee company submits following details of
records available with Assessing Officer, inquiries made by him and
replies and details submitted by the assessee company:
(a) As per the provisions of Section 35(2AB)(3) of the Act read with
Rule 6(7A) of the Income Tax Rules, in order to claim the deduction u/s.
35(2AB) of the Act, the assessee company needs to maintain separate
books of account for its approved R&D facility and the same is required
to be audited annually by a Chartered Accountant and a report for the
same is required to be submitted to the prescribed authority i.e. DSIR for
each year. It is also provided that the DSIR shall issue its report in
relation to the approval of in-house R&D facility in Form No. 3CL.
Hence, the assessee company had claimed the deduction u/s. 35(2AB)
after complying with all the statutory requirements and the expenditure
incurred by the assessee company on R&D activities have also been
verified and certified by DSIR.
(b) Vide submission dated 17.06.2016, the assessee company submitted
copy of Acknowledgement of Return of Income along with the Statement
of Total Income, wherein the claim made by the assessee company u/s.
35(2AB) of the Act was verifiable. Further, during the course of
assessment proceedings copy of Form 3CM issued by DSIR for approval
of the Torrent Research Centre as an in-house research centre and Form
3CL issued by DSIR were also submitted.
In order to verify the allowability of claim made by the assessee
company, the Assessing Officer had asked the assessee company to
submit the necessary details and an explanation as to why the weighted
deduction claimed by the assessee company in pursuance of section
35(2AB) should not be restricted to the weighted amount of quantum of
deduction certified by DSIR in Form No. 3CL.
(c) In response to the same, the assessee company submitted a detailed
explanation as regards following:
i. Torrent Research Centre (TRC) has been approved as an in-house
research centre by the prescribed authority i.e. DSIR;
ii. That the assessee company has complied with all the conditions as
prescribed u/s. 35(2AB) and hence, it is rightly entitled to claim the
deduction for expenditure incurred in respect of its approved R&D
activities;
iii. Though the Form 3CL does not require or seek information of
allowable or disallowable expenditure u/s. 35(2AB) of the Act, the
assessee company submitted, as required by Assessing Officer, a
reconciliation of the expenses that might have been excluded by
DSIR in issuing Form 3CL based on the basis of disallowance made
in preceding years;
iv. Detailed explanation in respect of nature of expenses which have
been excluded by DSIR in Form No. 3CL and why the same should
not be disallowed while determining the amount eligible for claim
of weighted deduction u/s. 35(2AB) of the Act.
A copy of the above submission dated 12.12.2016 is attached
herewith vide Annexure-3 for ready reference of your honour.
III. The submission of the assessee company that the amount eligible
for deduction u/s. 35(2AB) should not be restricted to the amount
certified by DSIR in Form 3CL was rejected by the Assessing Officer and
following adjustments were made by him.
(a) The following Disallowances were made by the Assessing Officer on
the ground that only the expenditure approved by DSIR is allowable u/s.
35(2AB) of the Act:
Particulars Rs. (in lakhs)
Amount certified by DSIR as expenses incurred outside approved

R&D facility
Clinical Research Expenses 1,214.01
Patent Expenses (Official Fees) outside India 57.32

(2021) ABC 159
Patent Expenses (Consultancy Fees) outside India 4,09.41
Interest on Loan 44.72
Labour charges/contract manpower/consultancy charges/retainer

ship
Labour & Job work charges 1,76.32
Professional Fees in and outside India (Rs. 81.89 lakhs spent in 90.48
India and Rs. 8.59 spent outside India)
Fees and Legal Expenses 14.73
Other Studies Expenses 2,01.32
(A) 2,208.31
Other expenditure not approved by DSIR
Building related recurring expenses 104.88
Municipal Taxes 12.84
Salary to Dr. C. Dutt 274.19
Employees not having degree in science 338.55
(B) 730.46
Total [C= (A+B)] 2,938.77
200% of capital expenditure (other than building of Rs. 137.50 275.00

lakhs) (D)
Total amount of Disallowance u/s. 35(2AB) - (C+D) 3,213.77

(b) The above table shows that the issues raised by your honour in the
show cause u/s. 263 of the Act were already inquired by Assessing
Officer and after rejecting the submissions of the assessee company the
said expenses were already disallowed. In this connection, the assessee
company further submits that the expenditure on Patents amounts to Rs.
4.67 crores and not Rs. 4.75 crores as mentioned in the above referred
show cause notice u/s. 263 of the Act. However, the assessee company
submits that an Amount of Rs. 4.75 crores is already disallowed by the
Assessing Officer and the same is worked out as under and the same is
verifiable from the above table in para III (a):
Particulars Amount Spent in India Amount Spent outside India Total
Patent Expense (Official Fees) 6.78 57.32 64.10
Patent Expense (Consulting Fees) 13.44 409.41 422.85
Professional Fees 81.89 8.59 90.48
Total 102.11 475.32 577.43

Further, it is also submitted that amount of Rs. 12.14 crores in respect of
Clinical Trial Expenses and Rs. 281.53 lakhs relating to Labour
charges/contract manpower/consultancy charges/retainer ship has also
been disallowed by the Assessing Officer in his assessment order.
These details of the disallowances made by Assessing Officer are
verifiable from the para 17.4 on page Nos. 71 to 73 of the Assessment
order. On perusal of the same, it can be observed that the Assessing
Officer has already made disallowance on account following R & D
expenses referred in your notice in the various paragraphs of the notice.
Particulars Para No. of notice u/s. Amount 1 disallowed by the
263-dated 18-08-2017 Assessing Officer
Patent Expenses -incurred outside India Para (iii) 466.75 Lakhs
Expenditure on Clinical Research Para (iv) 1214.01 Lakhs
Labour and Job-work charges Para-(v) 176.32 Lakhs
Professional Fees (Rs. 81.89 Lakhs spent in Para-(v) 90.48 Lakhs

India and Rs. 8.59 spent outside India)
Legal Expenses Para-(v) 14.73 Lakhs
Salary Expenses : Para-(v)
Salary to Dr. C. Dutt 274.19 Lakhs
Salary to Employees not having degree in 338.55 Lakhs

science
From the above, it is clear that the expenses referred in para-(Hi), (iv)
and (v) are already disallowed by the Assessing Officer in the order
passed u/s. 143(3) of the Act. Therefore, the said order is neither
erroneous nor prejudicial to the interest of the revenue.
IV. Further, regarding your honour's observation that the Assessing
Officer has not made inquiry as to whether separate expenses have been
incurred on quality control & regulatory approvals and whether these
expenses have been grouped into R&D expenses, the assessee company
submits as under:
(2021) ABC 161
(a) As stated in para 5.2(II)(c)(i) supra, the assessee company has vide
submission dated 10.12.2016, explained that all manufacturing & other
direct expenses incurred for each unit have been accounted directly in the
respective unit's books of account.
In this context, it may also be noted that the R&D center of the assessee
company is situated at Village Bhat, Dist. Gandhinagar in Gujarat,
whereas the manufacturing facilities of the assessee company are situated
at the following locations:
- Village Indrad, Taluka Kadi, Dist. Mehsana, Gujarat;
- Village Bhud, Nalagarh, Baddi, Dist. Solan, Himachal Pradesh;
- 32 No. Middle Camp, NH-31A, East District, Gangtok (Sikkim).
The above information was provided to the Assessing Officer when
specific query was raised by him on the same.
(b) In this background, your honour would appreciate that it is not
possible to send the goods manufactured in different units and at
different locations to R&D facility for quality control and testing
purpose. Hence, there does not arise a question that expenditure relating
to quality control & regulatory approvals are grouped into R&D expense.
Further, the expenditure on Quality control is part of production cost, as
it is incurred at the stage of production only and therefore, it is debited in
the books of account of the respective units. As the assessee company is
engaged in the business of manufacture and production of
pharmaceutical products, the Quality testing and approval process are
required to be carried out before the finished product is packed before its
removal from manufacturing plant. Accordingly, it is clear that the
quality control and testing activities can be carried out at manufacturing
plant only.
(c) At this point, the assessee company also reiterates that the
expenditure incurred on R&D facility is also verified by DSIR and after
verification the DSIR has excluded the expenditure amounting to Rs.
29.39 crores from the amount eligible for deduction u/s. 35(2AB) of the
Act which has been duly considered by Assessing Officer as explained in
Para 5.3(11) supra.
On the basis of above, the assessee company submits that it is not a case
that there is non-application of mind on the part of the Assessing Officer
in this matter as observed by your honour, but the Assessing Officer has
made in-depth inquiries regarding the amount of expenditure debited to
P&L, reconciliation and justification for the amount not approved by
DSIR and on that basis, not being satisfied by the replies of the assessee
company, the Assessing Officer has proceeded to make certain
disallowance as mentioned in para III supra of this point. Therefore, the
assessee company submits that the notice u/s. 263 of the Act issued by
your honour on this issue is devoid of any merits, as the order passed by
Assessing Officer is neither erroneous nor prejudicial to the interests of
the revenue.
5.4 Regarding Selling & Publicity Expenses (other than domestic)
II. Vide para No. (vi) of the above referred notice, your honour has
observed that the assessment order passed by the AO is erroneous and
prejudicial to the interest of Revenue by stating as under:
"(vi) You have claimed expenses on academic/scientific get together of
Rs. 9.44 Cr., sales promotion expenses of Rs. 1.48 Cr., business
advancement expenses of Rs. 1.48 Cr. (other than on domestic). The AO
has not made any enquiry as regards the incurring of such expenses nor
has he applied his mind as to whether such or part of such expenses fell
foul of local regulations prevailing in those countries regarding
gifting/other payments/expenses incurred on Doctors and Medical
practitioners. Further, the AO has also not examined if such expenses
incurred were rightfully belonging to the assessee company and not its
foreign subsidiaries which were also engaged in marketing of
formulations in other countries. Non-application of mind and non-inquiry
in this regard has rendered the impugned order as erroneous and
prejudicial to the interest of revenue."
II. In this connection, the assessee company submits following details
of records available with Assessing Officer, inquiries made by Assessing
Officer and replies and details submitted by the assessee company:
(a) During the course of assessment proceedings, the Assessing Officer
asked to provide break-up of Selling, publicity and medical literature
expenses amounting to Rs. 279.20 crores as appearing in Note No. 21
"Other Expenses" of Profit & Loss account along with explanation for
nature of expenses.
In response to the same, the assessee company submitted the detailed
breakup of selling and Publicity expenses incurred for Domestic Market
and other than Domestic Market, detailed explanation for nature of such
expenditure, along with break-up of Business Advancement expenses
giving details of items costing more than Rs. 1000/- and those less than
Rs. 1,000/-, vide submission dated 10.12.2016. Copy of the said reply is
annexed herewith vide Annexure-1(a) supra.
(b) On the basis of verification and examination of details submitted
vide abovementioned submitted dated 10.12.2016, the assessee company
was asked to show cause as to why expenses accounted under head of
Business Advancement Expenses and Doctors' Sponsorship, which are
grouped under Selling and Distribution Expenses should not be
disallowed, in view of the CBDT Circular No. 5/2012 dated 01.08.2012,
which provides for disallowance of deduction pertaining to freebies given
to medical practitioners.
(2021) ABC 163
In response to that the assessee company submitted
details vide submission dated 15.12.2016, as mentioned in para 5.1(ii)
(b) supra, a copy of which is annexed herewith vide Annexure-
1(b) supra.
III. Regarding your honour's above referred observations, the assessee
company submits as under:
(a) Your honour has observed that the Assessing Officer has neither
made any enquiry as regards the incurring of such expenses nor has he
applied his mind as to whether such or part of such expenses fell foul of
local regulations prevailing in those countries regarding gifting/other
payment/expenses incurred on Doctors and Medical Practitioners.
In this regards, the assessee company submits that as per Circular No.
5/2012 it has been provided that the claim of any expenditure incurred in
providing freebies in violation of the provisions of Indian Medical
Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002,
shall be inadmissible under Section 37(1) of the Act, being expenses
prohibited by law. This disallowance shall be made in the hands of such
pharmaceuticals or allied health sector industries or other assessee which
has provided such freebies and claimed it as a deductible expense in its
accounts against income.
In this context, the assessee company submits that the said regulations of
Indian Medical Council (MCI) has been issued as per the powers
conferred u/s. 20A r.w.s 33(m) of the Indian Medical Council Act, 1956
and the said Act is applicable to whole of India, as provided in section of
the said Act. Accordingly, it can be said that the aforementioned
regulation of 2002 are not applicable and binding to medical practitioners
outside India. Therefore, there are no provisions which denies the
deduction of business expenditure relating to Business Advancements,
which is allowable u/s. 37(1) of the Act. Hence, there is no non-
application of mind or non-enquiry on the part of the Assessing Officer
on this issue.
(b) Further, your honour has observed that the Assessing Officer has
not examined if such expenses incurred were rightfully belonging to the
assessee company and not its subsidiaries which were also engaged in
marketing or formulations in other countries.
* In this regards, the assessee company submits that the account of the
assessee company has been audited under The Companies Act as
well as the same are subject to Tax Audit under the provisions of
Income Tax Act. All the expenditure debited in its P&L account
have been verified by the Auditor as rightfully incurred by the
assessee company for its business.
* Vide submission dated 17.06.2016, the assessee company submitted
copy of Form No. 3CEB, from which the Assessing Officer verified
the details of transaction entered into with associated enterprises.
During the course of assessment proceedings, the assessee company
also submitted the documentation relating to Transfer Pricing,
which provide the basis of all the transactions with associated
enterprises and gives all the details which are self-explanatory.
Therefore, no further questions were required to be raised.
* In this context, the assessee company submits that for providing of
market information and regulatory support services in order to
promote the Company's business in the respective territory and to
act as a legal agent for the Company on all the matters related to
regulatory matters in those territories the assessee company has
entered into liaison support agreements with certain associated
entities. Details of these transactions are reported in the Transfer
Pricing Report u/s. 92D of the Act in Form 3CEB and Transfer
Pricing documentation, which has been submitted during the course
of assessment proceedings.
* Such expenses on liaison support services are duly incurred by the
Assessee Company and payable by it in connection with promoting
its business in foreign territories. However, the Assessing Officer
has allowed the same after thorough verification of Transfer Pricing
documentation.
IV. On the basis of above, the assessee company submits that the order
passed by Assessing Officer cannot be termed as erroneous and
prejudicial to the interests of the revenue because the Assessing Officer
has verified the Transfer Pricing report in Form No. 3CEB and the
Transfer Pricing documentation.’
4.4 It was thus contended before the Pr. CIT that there was no failure on the
part of the AO in making proper inquiries as required in the context of the
state of affairs of assessee and no further inquiry was plausible and called for.
It was also stated that it could not be said that inquiry was inadequate as
complete details were provided to AO and the accounts of the assessee (a
listed company) were duly audited and detailed disclosures of various aspects
of the financial statements were made and annexed to the audited statement. It
was thus contended by the assessee that proposed action of the Pr. CIT is not
permissible under Sec. 263 of the Act.
4.5 The Pr. CIT, however, did not accept the defence raised by the assessee
on issues raised in the show cause notice. The Pr. CIT, in essence, observed
that the assessment was completed by the AO in haste without proper
inquiries and verification which were necessary for the purpose of making
assessment. Consequently, the Revisional Commissioner set aside the
assessment framed under Sec.143(3) of the Act with directions to re-frame the
assessment after conducting requisite inquiries on the issues involved as
noticed by him.
(2021) ABC 165
5. Aggrieved by the aforesaid Revisionary order of the Pr. CIT under Sec.
263 which sought to cancel the assessment order, the assessee preferred the
appeal before the Tribunal.
6. The Learned Counsel for the assessee reiterated the aforementioned pleas
earlier raised before the Pr. CIT and vociferously exhorted that the assessee is
a listed company and is run by a professional Board. The accounts are
exhaustively audited and is subjected to comprehensive internal audit as well
as statutory audit. The assessee company is engaged in manufacture and
production of pharmaceutical products and is one of the leading and renowned
company in the sector. The company has reported generation of revenue from
pharmaceutical operations in the vicinity of Rs. 4000 Crores on average in last
two years. The income returned by the assessee is also to the tune of Rs.
584.13 Crores. The learned AR contended that in this backdrop, the action of
the AO requires to be evaluated.
6.1 The Learned AR thereafter adverted to the specific allegations raised on
various issues and submitted that the detailed reply before the Pr. CIT is self
explanatory.
6.2 Rebutting the alleged inadequacy in inquiry on expenditure of Rs. 24.32
Crores on gift item, the learned AR referred to the submissions made before
the Pr.CIT and submitted that the expenditure incurred towards gift is
miniscule having regard to the scale of operations. The learned AR referred to
page No.46 of the paper book showing break up of business advancement
expenses and submitted that most of the items involved are of very small
value items costing below Rs. 1000/- in each case and only items aggregating
to Rs. 24.3 Crores cost above Rs. 1000/- per item. The requisite details were
provided to the AO vide submission dated 17.06.2016 and 15.12.2016 to
explain its position. Despite the strong basis available for admission of the
entire expenses, the AO still indulged in disallowance of 10% of the entire
expenses of Rs. 55.14 Crores (including Rs. 24.3 Crore) to cover up the
possible expenses incurred for non-business purposes and for possible breach
of CBDT Circular No.5/2012. The AO had also made disallowance of entire
expenditure of nearly Rs. 26 Crores being expenses incurred on
academic/scientific grants to the Doctors in the nature of sponsorship
expenses. It was thus contended that the AO has decided the issue after
requisite application of mind and the revenue risks have been addressed far
more than what was possibly called for in the circumstances. To expand
further, the learned AR contended that it is not the objective of Section 263 of
the Act to interfere with the order of the AO in each and every type of
situation where the inquiry was not made in the manner expected by the
Revisional Officer from a perfectionist point of view. It was contended that
the quasi-judicial action of the AO cannot be lightly struck down without
showing it to be erroneous and prejudicial to the interest of the Revenue. The
AO has concluded the issue having regard to the totality of the facts and thus
cannot be branded as erroneous in the name of alleged inadequacy of inquiry.
6.3 The Learned AR thereafter referred to the next issue namely inquiry
regarding manufacturing process. The Learned AR in this regard submitted
that a bare reading of show-cause in this regard points out to the fact that the
inquiry expected itself is obscure. The Learned AR submitted that what kind
of inquiry regarding manufacturing process and goods being manufactured
was needed, which allegedly lead to erosion of taxes, has not been spelt at all.
6.4 Adverting to item No.3 of the show cause notice, the Learned AR for the
assessee submitted that requisite details of expenses on account of quality
control and regulatory approvals were placed on the records of the AO and
necessary inquiries were made by the AO as noted in the detailed submission
before the Pr.CIT. The Learned AR thereafter submitted that Torrent
Research Centre (TRC) was approved as an in-house Research Centre by the
prescribed authority i.e. DSIR. The assessee has filed requisite statutory forms
to support the compliance of conditions prescribed under Sec.35(2AB) of the
Act. The AO however did not accept the claim of the assessee in toto and
substantial disallowance aggregating to Rs. 3213.77 Lakhs was made as
detailed in the submissions and the assessment order. The advantage of
weighted deduction in respect of expenses towards quality control etc. has not
been taken. The learned AR submitted that in these circumstances, where the
submissions of the assessee were partly rejected after making enquiry, the
allegation towards inadequacy in enquiry is totally unsustainable. As
submitted, the issue towards separate expenses on quality control and
regulatory approvals was also addressed to the AO as pointed out in the
written submissions. Thus, non-application of mind of AO to the underlying
facts is not discernible.
6.5 Adverting to the clinical research expenditure of Rs. 1214.01 Lakhs, the
Learned AR submitted that clinical research expenses formed part of amount
eligible for deduction under Section 35(2AB) of the Act and was incurred
year after year having regard to the nature of pharmaceutical sector. The AO
indulged in re-working of eligible amount of deduction after taking into
account the expenditure approved by DSIR and after rejecting the
submissions of the assessee company on many aspects. The learned AR
referred to the detailed submissions made before the Revisional
Commissioner on what transpired before the AO. The Learned AR made
para-wise reference to the show cause notice and submitted that the
expenditure on clinical research amounting to Rs. 1214.01 Lakhs was inter
alia disallowed by the AO. Similarly, expenses incurred towards labour, job
work, professional fees, legal expenses and salary expenses as part of R&D
expenses etc. were verified. The Learned AR submitted that all such expenses
were subjected to objective scrutiny and a part of such expenditure was
disallowed by the AO. For instance, Rs. 176.32 Lakhs was disallowed out of
labour and job work, Rs. 90.48 Lakhs out of professional fees and Rs. 14.73
Lakhs was rejected out of legal expenses. Therefore, the allegation that the
AO acted perfunctorily on the issue is without any basis.
(2021) ABC 167
6.6 With reference to expenses claimed on academic/scientific get-together
of Rs. 9.44 Crores as well as sales promotion expenses of Rs. 19.57 Crores
and business advancement expenses of Rs. 1.48 Crores, the learned AR
responded to by stating that relevant details and records made available to the
AO was pointed out to the Pr.CIT in its written reply. It was pointed out to the
Pr. CIT that the breakup of such expenses was duly provided. Breakup of
business advancement expenses was provided giving details of items costing
more than Rs. 1000/- and those less than Rs. 1000/- also vide submissions
dated 10.12.2016. The assessee was also show caused by the AO in the matter
with reference to CBDT Circular No. 5/2012. It is after taking into account
the reply of the assessee dated 15.12.2016 and after taking note of
documentations relating to transfer pricing, the AO concluded on the expenses
incurred. This belies the allegation of Pr. CIT.
6.7 The Learned AR after addressing us on the factual aspects as noted
above, exhorted that the Revisional Commissioner has totally mis-directed
himself in law and has wrongly appreciated the factual aspects. The Learned
AR submitted that each and every issue raised by the Pr.CIT in its show cause
notice were thoroughly examined by the AO as demonstrated in the written
submission before the Pr.CIT. There was full application of mind on the part
of the AO on all the issues. The learned AR vehemently submitted that huge
adjustments to the returned income as a corollary to these factual
appreciation ipso facto vindicates the fact of proper enquiry and application of
mind. The assessment framed resulted in over all additions/disallowances of
approximately Rs. 131 Crores. A number of written submissions filed before
the AO during the course of assessment proceedings were also annexed to the
detailed response to the show cause notice issued under Section 263 of the
Act to shun the suspicion on issues frowned upon. It was thus contended on
behalf of the assessee that it was only after requisite inquiry and examination
of facts and after objective analysis thereof on each and every issue raised in
the show cause notice, the AO had adopted a view for or against the assessee.
It was thereafter vehemently submitted that such issues were already subject
matter of examination in the scrutiny assessments year-after-year in the past,
additions/disallowances flowing from the action of the AO were subjected to
judicial scrutiny before the appellate authorities. The learned AR thus
submitted that in the light of factual position explained towards each item, the
order of the AO cannot be faulted on the touchstone of Section 263 of the Act.
6.8 Expanding the deliberations further, the Learned AR thereafter alleged
that the Revisional Commissioner has attempted to wrongfully take shelter
of Explanation 2 to Section 263(1) for his actions de horse the material facts
and long standing background of the assessee. Adverting to Explanation 2 to
Section 263(1) relied upon by the Revisional Authority, the Learned AR
observed that as per the explanatory note provided to in the relevant Finance
Bill, 2015 for such insertion, the purpose of the insertion of aforesaid
Explanation was to provide clarity on the interpretation of expression
'erroneous in so far as it is prejudicial to the interest of the Revenue'. It was
thus contended that the aforesaid Explanation is only clarificatory and does
not in any way dilute the substantive requirements of Section 263(1) of the
Act. The learned AR relied upon the decision of the co-ordinate bench in the
case of Narayan Tatu Rane v. ITO, (2016) 2 ITJ Online 785 (Trib. -
Mumbai) to throw light on the scope and ambit of Explanation 2 as
understood judicially. The Learned AR submitted that in view of the decision
of the co-ordinate bench (supra) Explanation 2 shall apply only if the
assessment order has been passed without making inquiry or verification
which a reasonable and prudent Officer would have carried out in such cases.
Law does not provide to stretch the inquiries and verification to an extent
which may tantamount to oppression and harassment of a tax payer. The AO,
in the instant case, has arrived at conclusion after making several rounds of
inquiries and therefore the action of the AO cannot be impugned under
section 263 of the Act.
6.9 The Learned AR next relied upon the decision of the Hon'ble Gujarat
High Court in the case of CIT v. Arvind Jwellers, (2003) 259 ITR 502 (Guj.) :
(2002) 124 Taxman 615 to paddle a plea that provisions of Section 263 of the
Act cannot be invoked to correct each and every type of mistake or error
committed by the AO. It was claimed that the Revisional Authority has
neither demonstrated incorrect assumption of facts nor alleged the incorrect
application of law successfully. The Learned AR next referred to the decision
of the Hon'ble Gujarat High Court in the case of CIT v. R.K. Construction
Co., (2016) 1 ITJ Online 957 (Guj) : (2009) 313 ITR 65 : (2009) 221 CTR
415 : (2008) 175 Taxman 165 for the proposition that where the AO has taken
a particular view on the basis of evidences produced before him, it is not open
for the Commissioner, in the revisional proceedings under Section 263 of the
Act, to take a different view on the same material. The AO in the instant case
has specifically examined all the issues raised by Pr.CIT albeit not probably in
the manner in which the Pr.CIT would have liked but this cannot be the
ground for assumption of jurisdiction under Section 263 of the Act. The
Learned AR thus submitted in conclusion that the assessment order under
review cannot be labelled as erroneous insofar as prejudicial to the interest of
the Revenue within the terms of Section 263 of the Act in the circumstances
so narrated.
7. The Learned DR, on the other hand, vehemently supported the action of
the Revisional Authority and relied upon the order so passed under Section
263 of the Act. As regards, business advancement expenditure, the Learned
DR submitted that the AO has not made any inquiry as regards to whom the
gifts were distributed and underlying records thereon. Similarly, MCI
Regulations and CBDT Circular does not permit distribution of gifts to
medical practitioners. This aspect has not been examined at all. Similarly, the
Learned DR referred to the allocation of common expenses attributable to
Baddi & Sikkim Units and submitted that the Pr.CIT has rightly observed that
basis of allocation of expenses for determining the true profits eligible for
deduction under Chapter VIA was not inquired into. The learned DR objected
(2021) ABC 169
to the action of the AO towards expenses incurred on R&D expenses and
similar expenses and relied upon the order of the Pr.CIT. Other issues raised
in the show cause notice were also supported in the light of the order of the
Pr.CIT. The Learned DR accordingly submitted that the Revisional
Commissioner has acted within the four corners of the provisions of the Act
and as per the sanction of the law and consequently, the revisional action
requires to be upheld.
8. We have carefully considered the rival submissions and perused the
revisional order passed by the Pr.CIT under Section 263 of the Act as well as
other materials referred to and relied upon by the respective parties and case
laws cited.
8.1 Supervisory jurisdiction vested under Section 263 of the Act enables the
concerned Pr.CIT/CIT to review the records of any proceedings and order
passed therein by the AO. It empowers the Revisional Commissioner
concerned to call for and examine the records of another proceeding under the
Act and if he considers that any order passed therein by the AO is erroneous
insofar as it is prejudicial to the interest of the Revenue, then he may (after
giving the assessee an opportunity of being heard and after making or causing
to be made such inquiry as he deems necessary), pass such order thereon as
the circumstances of the case justify, including the order enhancing or
modifying the assessment or cancelling the assessment and directing afresh
assessment. Thus, the revisional powers conferred on the Pr.CIT/CIT under
Section 263 of the Act are of very wide amplitude with a view to address the
revenue risks which are objectively justifiable.
8.2 In the facts and circumstances of the case, the substantive issue that
emerges for adjudication is whether the Pr.CIT under the umbrella of
revisonary powers is entitled to upset the finality of assessment proceedings
before the AO where the AO has allegedly committed error in passing
assessment order without proper verification of expenses and deductions
claimed. Implicit in the question is the scope of powers of Revisional
Commissioner in the event of alleged inadequacy of enquiry into various
aspects of an issue.
8.3 On perusal of the show cause notice (SCN) dated 18.08.2017 issued by
the Revisional Commissioner proposing to set aside the assessment order
dated 26.12.2016 passed by AO under Section 143(3) of the Act, we notice
that the Pr.CIT is essentially dissatisfied with the degree of inquiry made in
respect of issues raised therein. Firstly, as per para (i) of SCN, the Pr.CIT
alleged that inquiry was not made on distribution of gift items to various
individuals which include expenditure incurred of Rs. 24.32 Crores on gift
items exceeding Rs. 1000/- each. Such non-inquiry was alleged to be
erroneous and prejudicial to the interest of the revenue. As noted above, the
assessee responded by stating that the detailed breakup of business
advancement expenses amounting to Rs. 55.14 Crores incurred was provided
to the AO in pursuance of specific query in this regard. This amount included
the impugned expenses towards gift items. The applicability of CBDT
Circular No. 5/2012 in this regard was also addressed whereby it was
submitted submit that this circular is applicable only where freebies above Rs.
1000/- per item were given to the medical practitioners. Despite production of
bills and records of the company, the AO embarked upon estimated
disallowance of 10% of entire expenses of Rs. 55.14 Crores which works out
to 5.51 Crores out of expenditure of Rs. 24.32 Crores on items exceeding Rs.
1000/- per item. This apart, as stated, the AO had also made disallowance of
entire expenditure of Rs. 25.99 Crores being expenses on academic/scientific
grants to Doctors. In such scenario, the allegation of the Pr.CIT towards
absence of inquiry on the point appears quite shallow. It may be pertinent here
to observe that in order to weigh the credence in the allegation of the
Revisional Commissioner, one requires to keep in mind the volume and
magnitude of transactions involved in a given case. As observed, the Revenue
from operations in the instant case is exceeding Rs. 4000 Crores. Likewise,
the quantum of expenditure incurred is pegged in excess of Rs. 3200/- Crore.
The profit before tax is in the vicinity of Rs. 850 Crores. Therefore, expecting
an AO to examine each and every item of income and expenditure and other
transactions to the hilt is fraught with serious constraints and does not appear
feasible. Noticeably, the assessee is a listed company and accounts are
subjected to multiple audits by expert professionals. The assessment is also
carried out on year-to-year basis. In such a scenario, where the AO has
rejected substantial amount from the claim of expenditure after reasonably
verifying bills and vouchers, the allegation of the Pr.CIT appears
misconceived. Ordinarily, it is only in a very gross case of inadequacy in
inquiry and lack of application of mind that the order of AO is open to attack
as erroneous. In the context of a turnover and scale of operation of this
magnitude, the expenditure incurred on business advancement of such amount
do not indicate any visible abnormality. This apart, the AO did take
cognizance of the issue and made substantial disallowance. Thus, it cannot be
outrightly alleged that the AO has omitted to apply its mind to the issue. The
allegation thus appears unintelligible. The AO, in our view, has not
committed any error in not chasing will of the wisp in the absence of any
brazen circumstances. The action of the Pr.CIT on this issue of business
advancement expenses appears to be guided by the considerations of Revenue
alone and thus cannot be viewed with favour.
8.4 The second issue flagged as per para (ii) of the show cause notice
concerns examination of certain points in relation to Baddi unit and Sikkim
unit. As an adjunct to this allegation, the Pr.CIT also asserted that the AO has
failed to apply as to what kind of medicines are being manufactured and
whether the units were API or it was formulation etc. We have perused the
allegation as reproduced in para 4 of this order. The Pr.CIT essentially opined
that the AO failed to make inquiry regarding the manufacturing process and
nature of medicines being manufactured and thus alleged that assessment
order is vitiated for this reason. In this connection, we take note of the reply
(2021) ABC 171
dated 10th December, 2016 placed by assessee before the AO touching the
aforesaid issue. As pointed out on behalf of the assessee, the books of
accounts of Baddi unit and Sikkim units are maintained separately and the
allocation of common expenditure is made on rational basis consistently
followed year after year. The AO has examined the issue reasonably and had
also posed several queries to the assessee in the course of the assessment
proceedings towards basis of allocation of common expenses and R&D
expenses and also discovery costs of R&D expenses and capital expenditure
on R&D etc. The eligibility for claim of deduction under section 80IC of the
Act (Baddi unit) and 80IE of the Act (Sikkim unit) was also verified. Thus,
the AO was clearly live to the issue and there was active application of mind
in as much as the AO indulged in re-allocation of expenses and re-
determination of amount eligible of deduction under Section 80IC and 80IE of
the Act. Significantly, the AO made disallowance of Rs. 27.47 Crores in
relation to Baddi unit and Rs. 70.87 Crores in relation to Sikkim unit. To
dwell further, it is also the case of the assessee that Baddi unit came in
existence way back in AY 2006-07 and has been subjected to scrutiny year
after year. Thus, there appears no perceptible occasion for the AO to revisit
the facts concerning manufacturing process etc. threadbare as raised. The
Sikkim unit is also in operation since AY 2012-13 and thus, this is not the
first year of operation. We also note that the assessment made on similar basis
was accepted in the earlier year as well as in subsequent assessment years. In
such a scenario, it is equally plausible that racking up already settled aspects
year after year may not have been found necessary to the wisdom of AO.
Although, desirable from the idealistic point of view of Revisional
Commissioner, the records suggest that the AO cannot be blamed to have
acted in a perfunctory manner. Where the AO has examined the expenditure
concerning these units and restricted the deductions claimed thereon, one
cannot possibly say that the AO has sleepwalked on the issue. Owing to
continuity of operations and in the absence of any strong circumstance which
may provoke inquiry as desired by Pr.CIT, conclusion drawn by the AO
should not be ordinarily disturbed. Needless to say, the Pr.CIT ought to have
make inquiry on the issue himself if so considered expedient to at least prima
facie demonstrate in action of the AO which rendered the order erroneous
which also caused prejudice to the Revenue. Merely because the expectations
of the Revisional Commissioner are purportedly not met, it should not
necessarily trigger revisional action under Section 263 of the Act in every
case. The discretion given to the supervisory authority is expected to exercise
in a judicial manner having regard to the totality of facts.
8.5 We shall now turn to the next issue namely non inquiry towards quality
control and regulatory approval in relation to R&D expenses on which the
assessee has claimed weighted deduction. In this regard, we refer to the reply
of the assessee before the Pr.CIT clarifying the issue. The Pr.CIT has not
rebutted the explanation of the assessee anywhere. It was pointed out by the
assessee before the Pr.CIT that it had already informed the AO vide
submissions dated 10.12.2016 filed in the course of assessment proceedings
that all manufacturing and direct expenses incurred for each unit have been
accounted directly in the respective books of accounts of given unit. It was
clarified that expenditure relating to quality control and regulatory approvals
were not grouped into R&D expenses. The quality control has been claimed
as an ordinary expenditure in the respective books of various units as it is a
part of the production costs. The assessee further clarified that after
verification, the approving authority namely DSIR excluded the expenditure
amounting to Rs. 29.39 Crores from the amount eligible for weighted
deduction under Section 35(2AB) of the Act. This aspect was also duly taken
note of by AO while framing the assessment. In view of the unequivocal stand
taken by the assessee before the AO as well as before the Pr.CIT, which has
not been dislodged at any stage, the allegation towards non-application of
mind on the issues of R&D expenses fades into insignificance and does not
survive against the assessee. We thus find that the impugned allegation
pertaining to R&D expenses also does not hold any water.
8.6 In response to the concern of the Pr.CIT towards patent related
expenditure outside India amounting to Rs. 475.32 Lakhs as not eligible for
weighted deduction under Section 35(2AB) of the Act, we observe from the
reply of the assessee before the authorities below that the aforesaid amount
was already disallowed by the AO and therefore the concern of the Pr.CIT is
misplaced. It is also noticed that apart from disallowance of patent related
expenses, substantial amount out of expenditure on clinical research (Rs.12.41
Crore), labour and job work charges (Rs.1.76 Crore), professional fee
(Rs.90.48 Lakhs), legal charges (Rs.14.73 Lakhs) and salary to Dr. C. Dutt
(Rs.2.72 Crores) as well as salary to employees not having degree in science
(Rs. 3.38 Cores) was disallowed by the AO out of R&D expenses. Therefore,
the concern raised by the Pr.CIT as per paras (iv) & (v) also was addressed by
the AO and allegation of the Pr.CIT on mechanical acceptance of such aspects
by AO is on tenuous grounds.
8.7 Vide para (vi) of the show cause notice, the Pr.CIT also alleged
deficiency in examination of academic/scientific get together expenses of Rs.
9.44 Crores, sales promotion expenses of Rs. 19.57 Crores and business
advancement expenses of Rs. 1.48 Crore (other than an domestic). In this
regard, as noticed, it is the case of the assessee that queries were duly raised in
this connection and responded to by the assessee vide its submission dated
10.12.2016 before the AO. The eligibility of expenses were examined on the
touchstone of CBDT Circular 5/2012 dated 01.08.2012 which provides for
disallowance of deduction pertaining to freebies given to medical
practitioners. Further, reply dated 15.12.2016 was also filed in relation to the
issue. This apart, vide submission dated 17.06.2016, the assessee company
also submitted copy of Form No. 3CEB towards details of transaction entered
into with Associated Enterprises. The transactions are also reported in the
transfer pricing report under Section 92D as well as in transfer pricing
documentation during the course of assessment proceedings. It is the case of
(2021) ABC 173
the assessee that the expenses incurred towards promoting its business in
foreign territory were allowed after thorough verification of transfer pricing
documentation. The applicability of CBDT Circular No. 5/2012 (supra) on
account of items costing less than Rs. 1000/- given as a freebies to medical
practitioners is, at best, a debatable issue in view of the language employed
the circular. The AO has examined all the aspects and has recorded a
conscious finding on each issue. The action of the Revisional Commissioner
is not tenable on this score either.
8.8 On a broader reckoning, we note that it is the case of the assessee that the
AO has recorded a conscious finding after considering the factual matrix in
the given context and in the light of prevailing legal position and having
regard to the past history of the case on each and every issue raised by Pr.CIT.
We notice that the assessment so framed has run into more than 100 pages
and has resulted in approximate additions/disallowances of whopping Rs. 131
Crore. All the issues raised by the Pr.CIT has been duly touched and certain
adjustments have been already carried out by the AO. Besides, the assessee is
a Public Limited Company listed on the Stock Exchanges and is reckoned to
be a valuable company in the pharmaceutical sector stated to be run by a
dedicated team of professional management. The assessment of the assessee is
carried out on a year to year basis. Having regard to the staggering turnover
and scale of operation, it is virtually impossible for any adjudicating authority
to examine and re-examine all the points in a given assessment year to the hilt
as perceived by the Pr.CIT. The assessee has filed its detailed counter before
the Pr.CIT to address the issues raised in the show cause notice. The Pr.CIT
has not given any cogent rebuttal in its order as to how the so called
inadequacies in the enquiries made has dented the ultimate outcome in
assessment order. The action of the Revisional Commissioner requires to be
objectively justifiable and cannot be a mere ipse dixit. The Pr.CIT ought to
have made some elementary inquiry himself to unearth alleged error in the
order of the AO which caused prejudice to the Revenue. Instead, the Pr.CIT
has merely alleged absence of fuller inquiry and non-application of mind
without showing any systematic efforts on his part to support the allegations.
We are of the firm view that the Pr.CIT was expected to do more in the
totality of the facts and context. Thus, it is difficult to agree with the
allegation of the Pr.CIT on any of the issues raised in the show cause notice
and the revisional Order.
9. The Pr.CIT has drawn support from newly inserted Explanation 2 below
Section 263(1) of the Act introduced by Finance Act, 2015 w.e.f. 01.06.2015
for his action. The Explanation 2 inter alia provides that the order passed
without making inquiries or verification 'which should have been made' will
be deemed to be erroneous insofar as it is prejudicial to the interest of the
Revenue. It is on this basis, the assessment order passed by the AO under
Section 143(3) of the Act has been set aside with a direction to the AO to pass
a fresh assessment order. It will be therefore imperative to dwell upon the
impact of Explanation 2 for the purposes of Section 263 of the Act.
9.1 The aim and object of introduction of aforesaid Explanation by Finance
Act, 2015 was explained in CBDT Circular No. 19/2015 (F.NO.142/14/2015-
TPL), Dated 27.11.2015 which is reproduced hereunder:
‘53. Revision of order that is erroneous in so far as it is prejudicial to the
interests of revenue.
53.1 The provisions contained in sub-section (1) of Section 263 of the
Income Tax Act, before amendment by the Act, provided that if the
Principal Commissioner or Commissioner considers that any order
passed by the Assessing Officer is erroneous in so far as it is prejudicial
to the interests of the Revenue, he may, after giving the assessee an
opportunity of being heard and after making an enquiry pass an order
modifying the assessment made by the Assessing Officer or cancelling
53.2 The interpretation of expression "erroneous in so far as it is
prejudicial to the interests of the revenue" has been a contentious one. In
order to provide clarity on the issue, Section 263 of the Income Tax Act
has been amended to provide that an order passed by the Assessing
Officer shall be deemed to be erroneous in so far as it is prejudicial to the
interests of the revenue, if, in the opinion of the Principal Commissioner
or Commissioner.– (a) the order is passed without making inquiries or
verification which, should have been made; (b) the order is passed
allowing any relief without inquiring into the claim; (c) the order has not
been made in accordance with any order, direction or instruction issued
by the Board under Section 119; or (d) the order has not been passed in
accordance with any decision, prejudicial to the assessee, rendered by the
jurisdictional High Court or Supreme Court in the case of the assessee or
any other person.
53.3 Applicability: This amendment has taken effect from 1st day of
June, 2015.'
9.2 A bare reading of the Circular gives a somewhat impression that
the Explanation 2 was inserted for the purpose of providing clarity on the
expression 'erroneous insofar as it is prejudicial to the interest of the
Revenue'. The Explanation being clarificatory would not lead to dilution of
the basic requirements of Section 263(1) of the Act. The provisions of Section
263 although appears to be of a very wide amplitude and more particularly
after insertion of Explanation 2 but cannot possibly mean that recourse to
Section 263 of the Act would be available to the Revisional Authority on each
and every inadequacy in the matter of inquiries and verification as perceived
by the Revisional Authority. The Revisional action perceived on the pretext of
inadequacy of enquiry in a plannery and blanket manner must be desisted
from. The object of such Explanation is probably to dissuade the AO from
passing orders in a routine and perfunctory manner and where he failed to
carry out the relevant and necessary inquiries or where the AO has not applied
mind on important aspects. However, in the same vain where the
(2021) ABC 175
preponderance of evidence indicates absence of culpability, an onerous
burden cannot obviously be fastened upon the AO while making assessment
in the name of inadequacy in inquiries or verification as perceived in the
opinion of the Revisional Authority. It goes without saying that the exercise
of statutory powers is dependent on existence of objective facts. The powers
outlined under Section 263 of the Act are extraordinary and drastic in nature
and thus cannot be read to hold that an uncontrolled, unguided and
uncanalised powers are vested with the competent authority. The powers
under Section 263 of the Act howsoever sweeping are not blanket
nevertheless. The AO cannot be expected to go to the last mile in an enquiry
on the issue or indulge in fleeting inquiries. The action of the Revisional
Commissioner based on such expectation requires to be struck down.
9.3 The use of expression 'which should have been made' in clause (a)
to Explanation 2 to Section 263 of the Act is significant. This impliedly tests
the action of AO on the touchstone of reasonableness and rationality in
approach. It clearly suggests that context also holds the key in the matter of
enquiry. The action of the AO requires to be evaluated contextually. If the
aforesaid Explanation is read in a abstract manner de horse the test of
reasonableness and context, the powers of Revisional CIT would be rendered
invincible and almost every assessment order can be possibly frustrated. A
nuanced understanding of Explanation suggests that inadequacy in inquiry
ought to be of cardinal nature to ignite the potent powers of review.
9.4 As noted, the assessee is a very big player in the pharma sector and
enormity of operation is to be kept in mind. Thus what is relevant is to weigh
as to what countervailing circumstances were prevailing which ought to have
provoked such enquiry by a reasonable person instructed in law. In the instant
case, apart from noticing that each and every issue raised in the notice were
subject matter to enquiry in one way or the other, we also cannot remain
oblivious of the facts that the financial accounts of the assessee are subjected
to various kinds of audits under different Acts and the assessee being a listed
company is presumed to function in a disciplined and regulatory environment.
In the context of the mammoth scale of operation coupled with regularity of
the scrutiny assessment year after year, we find apparent plausibility and
sufficient strength in the contentions raised on behalf of the assessee in its
defense. Having regard to colossal volume, the serious time and capacity
constraints saddled upon AO while raising pitch for deeper examination must
be borne in mind.
9.5 We thus find merit in the plea of the assessee that the Revisional
Commissioner is expected show that the view taken by the AO is wholly
unsustainable in law before embarking upon exercise of revisionary powers.
The revisional powers cannot be exercised for directing a fuller inquiry to
merely find out if the earlier view taken is erroneous particularly when a view
was already taken after inquiry. If such course of action as interpreted by the
Revisional Commissioner in the light of the Explanation 2 is permitted,
Revisional Commissioner can possibly find fault with each and every
assessment order without himself making any inquiry or verification and
without establishing that assessment order is not sustainable in law. This
would inevitably mean that every order of the lower authority would thus
become susceptible to Section 263 of the Act and, in turn, will cause serious
unintended hardship to the tax payer concerned for no fault on his part.
Apparently, this is not intended by the Explanation. Howsoever wide the
scope of Explanation 2(a) may be, its limits are implicit in it. It is only in a
very gross case of inadequacy in inquiry or where inquiry is per se mandated
on the basis of record available before the AO and such inquiry was not
conducted, the revisional power so conferred can be exercised to invalidate
the action of AO. The AO in the present case has not accepted the
submissions of the assessee on various issues summarily but has shown
appetite for inquiry and verifications. The AO has passed the order in great
detail after making several allowances and disallowances on the issues
involved impliedly after due application of mind. Therefore,
the Explanation 2 to Section 263 of the Act do not, in our view, thwart the
assessment process in the facts and the context of the case. Consequently, we
find that the foundation for exercise of revisional jurisdiction is sorely
missing in the present case.
10. Resultantly, the order of the Pr.CIT passed under Section 263 of the Act
is set aside and cancelled and the order of the AO under Section 143(3) is
restored.
11. In the result, the appeal of the assessee is allowed.
_____________
Shweta Agrawal
Reference Judgments
(2016) 2 ITJ Online 925 (Trib.- Mum)

In the ITAT, Mumbai Bench
M/s Crompton Greaves Ltd.
v.
Shri Shailendra Kumar Yadav, JM And Shri Ramit Kochar, AM
ITA Nos. 1994/Mum/2013, 2836/Mum/2014
1st February, 2016
Appeal- S.246A of Income Tax Act,1961-Jumping Jurisdiction-Revisional

Jurisdiction Exercised By Commissioner-U/s. 263 of Income Tax Act,1961-
Scrutiny Assessment U/s. 143(3) of Income Tax Act,1961-Original
Assessment-Appeal before ITAT-That the assessee company is engaged in the
business of manufacturing, marketing and operating turnkey projects over a
(2021) ABC 177
diverse portfolio that includes power systems, industrial systems and
consumer products, networking and telecommunication equipments. The
assessee company filed its return of income with Revenue for the Assessment
Year 2007-08 on 29.10.2007 and thereafter filed revised return on 24.03 2009.
The case was selected for scrutiny and assessment was framed by the AO vide
assessment order dated 28.12.2010 passed u/s. 143(3) of the Act. Thereafter,
the CIT issued notice dated 06.12.2012 u/s. 263 of the Act observing that the
assessment u/s. 143(3) of the Act was made by the AO in a routine and
perfunctory manner. The CIT observed that the AO failed to carry out the
necessary enquiry as warranted by the facts and circumstances of the case
for proper completion of the assessment u/s. 143(3) of the Act. The CIT
noticed from the assessment records that the assessee company has claimed
deduction for expenditure in respect of provisions on account of “Warranty,
Sales Tax, Excise and Liquidated Damages”. The CIT observed that it is a
settled principle of law that no expenditure in nature of contingent
expenditure or provisions for expenditure can be allowed u/s. 28 or 37 of the
Act , unless the assessee company followed mercantile system of accounting
and liability claimed on accrual basis has crystallized during the previous year
relying on decision of Shri Sajjan Mills Limited v. CIT, (1985) 156 ITR 585
(SC). The CIT noticed from the schedule 16 read with note 33 to schedule 13,
that the expenditure of Rs. 17.72 crores claimed by the assessee company was
nothing but “provisions” for expenditure. The CIT observed that the AO
failed to make relevant and meaningful enquiry to the fact that liabilities in
this regard (liability relating to Warranty, Sales Tax, Excise and Liquidated
Damages ) has crystallized to the extent deduction has been claimed in the
return of income during the previous year relevant to the Assessment Year
2007-08 for which deduction has been claimed. The CIT vide notice dated
06.12.2012 intended to set aside the assessment for the Assessment Year
2007-08 framed by the AO u/s. 143(3) of the Act vide orders dated
28.12.2010 as it was observed by the CIT that the AO has acted in a routine
and perfunctory manner and failed to carry out relevant and necessary
inquiries and examination as warranted by the facts of the case and made an
assessment order which is erroneous and prejudicial to the interest of the
Revenue.
-The CIT, however, held that the AO was required to examine that provisions
made for warranty etc. was based on estimates which were realistic and based
on the past experience of the assessee company. The CIT held that the AO
was required to examine the actual outgoing during the year and that excess
provisions if any made in the earlier year was duly written back as income in
the following years, but he AO did not examine the basis for provisions made
for sales tax and excise duty liability and on what account these provisions
were justified. For claim of deduction for warranty, the AO has not examined
the contract and find out when the warranty was expiring, the justification for
allowing the provision cannot be made out. The CIT held that the AO was
required to examine the normal range of the failure of the products of the
company and in how many cases the assessee was required to carry out
repairs/replace the goods and only then the AO could decide about the
genuineness and reasonableness of the provision of warranty. However, the
AO has not considered these basic details and allowed the claim of the
assessee company in full without making these elementary inquiries and
without going into the issue as to whether any disallowance was required to
be made by the AO and if yes, as how much disallowance out of the claim for
provisions for warranty etc. should have been made, but the AO did not carry
out all these relevant inquiries.
-Held-
-this instant appeal bearing ITA No. 2836/Mum/2014 cannot be adjudicated
by the Tribunal as the first appeal against the orders dated 24.02.2014 passed
by the AO u/s. 143(3) of the Act read with Section 263 of the Act shall lie and
fall with in the jurisdiction of the CIT(A) u/s. 246A(1)(a) of the Act. We have
observed that the first appeal is filed directly by the assessee company in ITA
No. 2836/Mum/2014 before the Tribunal, which the Tribunal is not competent
to adjudicate as per provisions of Section 253(1) of the Act because the first
appeal lie’s before the CIT(A) u/s. 246A(1)(a) of the Act and hence the appeal
filed by the assessee company is hereby dismissed. However, the assessee
company is at liberty to file an appeal before the CIT(A) u/s. 246A(1)(a) of
the Act for adjudication on merits. The CIT(A) shall consider the relevant fact
that in the intervening period the assessee company was pursuing the appeal
with the Tribunal albeit at wrong forum with the Tribunal instead of filing the
first appeal with the CIT(A) as provided u/s. 246A(1)(a) of the Act , which
relevant fact shall be considered liberally by the CIT(A) while adjudicating
the condonation application, if filed by the assessee company , while
adjudicating the appeal on merits.
Relevant Provisions : S.263, 246A of the Income Tax Act,1961
Relevant Period : A.Y. 2007-08.
Allied Motors Private Limited v. CIT, (1997) 91 taxman 205 (SC) [Refer
Para 9]
Brij Mohan Das Laxman Das v. CIT, (2016) 2 ITJ Online 763 (SC) : (1997)
CIT v. Ashoka Engineering Co., (1992) 194 ITR 645(SC) [Refer Para 13]
CIT v. Gopal Purohit, (2011) 336 ITR 237 (Bom) [Refer Para 4]
CIT v. Infosys Technologies Ltd, (2012) 349 ITR 610 (Karn) [Refer Para 4]
CIT v. Mangal Castings, (2008) 303 ITR 23 (P&H) [Refer Para 4, 5]
CIT v. Max India Ltd., (2016) 2 ITJ Online 366 (SC) : (2014) 10 STD 43 :
(2007) 295 ITR 282 : (2007) 213 CTR 266 : (2008) 166 Taxman 188 :
(2008) 10 ITJ 8 [Refer Para 4, 5]
(2021) ABC 179
CIT v. MEPCO Industries Ltd., (2007) 294 ITR 121 (Mad.) [Refer Para 4, 5]
CIT v. Nokia Siemens Networks India (P) Ltd., (2011) 14 Taxmann.com 84
(Kar). [Refer Para 4]
CIT v. Podar Cement Pvt. Limited, (2016) 1 ITJ Online 956 (SC) : (1997)
CIT v. Vintec Corpn. (P) Ltd., (2005) 146 taxman 313 (Delhi) [Refer Para 4]
Colorcraft Kashimira Ceramic Compound v. ITO, (2007) 105 ITD 599
(Mum) [Refer Para 7]
Hamilton Research and Technologies (P) Ltd. v. ACIT, (2005) 142 Taxman
79 (Mag)(Kol-Trib) [Refer Para 4]
K.C.P. Ltd. v. ITO, (1990) 34 ITD 50 (Hyd.)(SB) [Refer Para 7]
Malabar Industrial Co. Ltd. v. CIT, (2018) 5 ITJ Online 298 (SC) : (2016) 28
ITJ 133 : (2000) 243 ITR 83 : (2000) 159 CTR 1 : (2000) 109 Taxman 66
[Refer Para 4, 5, 9]
Radhasoami Satsang v. CIT, (2016) 2 ITJ Online 808 (SC) : (1992) 193 ITR
321 : (1991) 100 CTR 267 : (1992) 60 Taxman 248 [Refer Para 4]
Rotork Controls India P. Ltd. v. CIT, (2009) 314 ITR 62 (SC) [Refer Para 4]
Shri Sajjan Mills Limited v. CIT, (1985) 156 ITR 585 (SC) [Refer Para 4]
Sundaram Pillai v. Pattabiram, (1985) 1 SCC 591[Refer Para 9]
Counsel :
– Pradeep N. Kapasi, Assessee;
– C.W. Angolkar, for the Revenue.
ORDER
Shri Ramit Kochar, AM :
1. These two appeals by the assessee company are related to the Assessment
Year 2007-08, ITA No. 1994/Mum/2013 is directed against the order dated
06.02.2013 passed u/s. 263 of the Income Tax Act, 1961 (Hereinafter called
“the Act”) by the learned Commissioner of Income Tax - 6, Mumbai
(Hereinafter called “the CIT”) while ITA No. 2836/Mum/2014 is directed
against the order dated 24.02.2014 passed u/s. 143(3) of the Act read with
Section 263 of the Act passed by learned assessing officer (Hereinafter called
“the AO”). Both these appeals are heard together and disposed of by this
common order for the sake of convenience and brevity.
2. We are first taking up the appeal for the Assessment Year 2007-08 vide
ITA No. 1994/Mum/2013 arising from the order dated 06.02.2013 passed u/s.
263 of the Act by the CIT. The following grounds of appeal have been raised
by the assessee company in the memo of appeal filed with the Tribunal as
under :–
“1. Invalid Revision u/s. 263.
(a) The Ld. CIT erred in law and facts of the case in initiating revisionary
proceedings u/s. 263 and thereafter in passing an order u/s. 263
ignoring the fact that the order passed by the Ld. AO. U/s. 143(3) dt.
28.12.2010 was neither erroneous nor prejudicial to the interest of
the revenue in as much as the Ld. AO had applied his mind and had
made proper inquiries to his satisfaction before passing the
assessment order.
(b) Your appellant submits that;
(i) The Ld. AO had completed the assessment for A.Y. 2007-08
after detailed inquiry and appreciation of the facts, evidences
and the law. The provisions made on account of warranty,
liquidated damages, sales tax and excise duty represented
lawful business expenditures of the company and provisions
were made in accordance with AS 29 of the ICAI and were
allowed by the AO. Only after due consideration of the fact
and of the law of allow ability of such expenses and in that
view of the matter the order could not have been termed as
erroneous or prejudicial to the interest of the law.
(ii) The company had made complete disclosure of the facts in its
financial statements under schedule 16 which are duly audited,
and particularly vide Note no. 33 of schedule B of Notes to
accounts. The adequacy of the provisions and the need and the
justification thereof was ascertained by the auditors and was
approved by them without any qualifications in their report.
(c) Your appellant pleads that such an order of CIT be held to be bad in
law and be quashed.
2. Serious Violation of Natural Justice
(a) The Ld. CIT erred in law and on facts in completing the revisionary
proceedings in a complete haste and without giving sufficient time
and opportunity and erred in law in ignoring all the evidences and
proofs and documents available on records and further erred in
treating the order passed by AO as erroneous and prejudicial to the
interest of the revenue and setting aside the same without bringing
any material of whatsoever nature in record.
(b) Your appellant submits that proper procedure as required by law was
not followed before passing of order u/s. 263.
(c) Your appellant pleads that an assessment made in violation of the
provisions of natural justice be quashed.
3. Claim For Deduction For Expenses Made On Account Of
Warranty, Liquidated Damages, Sales Tax And Excise Duty.
(a) The Ld. CIT erred in law and on facts in directing Ld. AO to
disallow the claim for deduction for expenditures in respect of
warranty, liquidated damages, sales tax and excise duty.
(2021) ABC 181
(i) During the year the company had accounted for expenses on
warranty amounting to Rs. 5,53,40,000/- (Rs. 8,47,60,000 - Rs.
2,94,20,000) and liquidated damages amounting to Rs.
9,08,90,000/-. The assessee company gave warranties on
certain products and services in the nature of
repairs/replacement, which fail to perform satisfactorily during
the warranty period. Debited to account, represented the
amount of the expected cost of meeting such obligation on
account of rectification/replacement and was based upon the
sales made during the year. The company regularly accounts
for warranty at varied rates depending upon the product sold.
The company had accounted for warranty expenses in
proportion to sales. Unutilized amounts are regularly accounted
as income.
(ii) Expenses for liquidated damages has been made on contracts
which were executed by the company beyond the agreed
delivery dates and the compensation payable by the company
for delay was computed in reasonable and prudent manner.
(iii) These expenses for warranty and liquidated damages have been
quantified based on past experience of the company. In
addition, the company has a policy to write back all the unused
amounts and offer the same for taxation on expiry of the
relevant period for warranty and liquidated damages.
(iv) There is no leakage of revenue. Further, the company is being
taxed at a flat rate of 30%.
(v) During the year the company has accounted for sales tax
amounting to Rs. 2,67,00,000/- representing sales tax liability
on account of non- collection of declaration forms under the
Act/Rules.
(vi) During the year the company has accounted for excise duty
amounting to Rs. 43,00,000/- representing the differential duty
liability that has materialized in respect of matters contested in
appeal.
(vii) Without prejudice kindly note that all of the expenses under
consideration were quantified and accounted by following the
sound accounting principles and the policies followed were
mandated by Accounting Standard 29 of the ICAI r.w.s. 209 of
the Companies Act.
(viii) Accounting was compulsory and statutory and in the
circumstances the liability had arisen in respect of the
concerned expenses and in that position, each of the
expenditure for which provisions were made satisfied the test
of Section 37 and of Section 28 for being allowed in
computation of total income for the year under consideration.
(ix) The method of accounting followed was mercantile and in
following the method the sound accounting principles and
policies were applied by keeping in mind the concepts of AS 1
namely 'prudence' and 'conservatism.'
(x) The method followed was consistently employed from year to
year and the provisions were made there under, consistently
and regularly for the above mentioned expenses and liabilities.
(xi) The company had made complete disclosure of the facts in its
financial statements which are duly audited, under schedule 16
and particularly vide Note no. 33 of schedule B of Notes to
accounts. The adequacy of the provisions and the need and the
justification thereof was as certained by the auditors and was
approved by them without any qualifications in their report.
(c) Your appellant pleads that appellant's claim for deduction on account
of warranty, liquidated damages, sales tax and excise duty be
allowed.
All the above grounds are independent and without prejudice each
other.”
3. Although, the assessee company has raised grounds 1 to 3 with sub-
clauses, but in sum and sub-stance , the assessee company has challenged the
legality and validity of the order dated 06.02.2013 passed by the CIT u/s. 263
of the Act.
4. The facts in brief are that the assessee company is engaged in the business
of manufacturing, marketing and operating turnkey projects over a diverse
portfolio that includes power systems, industrial systems and consumer
products, networking and telecommunication equipments. The assessee
company filed its return of income with Revenue for the Assessment Year
2007-08 on 29.10.2007 and thereafter filed revised return on 24.03 2009. The
case was selected for scrutiny and assessment was framed by the AO vide
assessment order dated 28.12.2010 passed u/s. 143(3) of the Act. Thereafter,
the CIT issued notice dated 06.12.2012 u/s. 263 of the Act observing that the
assessment u/s. 143(3) of the Act was made by the AO in a routine and
perfunctory manner. The CIT observed that the AO failed to carry out the
necessary enquiry as warranted by the facts and circumstances of the case
for proper completion of the assessment u/s. 143(3) of the Act. The CIT
noticed from the assessment records that the assessee company has claimed
deduction for expenditure in respect of provisions on account of “Warranty,
Sales Tax, Excise and Liquidated Damages”. The CIT observed that it is a
settled principle of law that no expenditure in nature of contingent
expenditure or provisions for expenditure can be allowed u/s. 28 or 37 of the
Act , unless the assessee company followed mercantile system of accounting
(2021) ABC 183
and liability claimed on accrual basis has crystallized during the previous year
relying on decision of Shri Sajjan Mills Limited v. CIT, (1985) 156 ITR 585
(SC). The CIT noticed from the schedule 16 read with note 33 to schedule 13,
that the expenditure of Rs. 17.72 crores claimed by the assessee company was
nothing but “provisions” for expenditure. The CIT observed that the AO
failed to make relevant and meaningful enquiry to the fact that liabilities in
this regard (liability relating to Warranty, Sales Tax, Excise and Liquidated
Damages ) has crystallized to the extent deduction has been claimed in the
return of income during the previous year relevant to the Assessment Year
2007-08 for which deduction has been claimed. The CIT vide notice dated
06.12.2012 intended to set aside the assessment for the Assessment Year
2007-08 framed by the AO u/s. 143(3) of the Act vide orders dated
28.12.2010 as it was observed by the CIT that the AO has acted in a routine
and perfunctory manner and failed to carry out relevant and necessary
inquiries and examination as warranted by the facts of the case and made an
assessment order which is erroneous and prejudicial to the interest of the
Revenue by relying on the decisions in the case of Malabar Industrial Co.
Ltd. v. CIT, (2018) 5 ITJ Online 298 (SC) : (2016) 28 ITJ 133 : (2000) 243
ITR 83 : (2000) 159 CTR 1 : (2000) 109 Taxman 66, in the case of CIT v. Max
India Ltd., (2016) 2 ITJ Online 366 (SC) : (2008) 10 ITJ 8 : (2014) 10 STD
43 : (2007) 295 ITR 282 : (2007) 213 CTR 266 : (2008) 166 Taxman 188, CIT
v. Mangal Castings, (2008) 303 ITR 23 (P&H) and CIT v. MEPCO Industries
Ltd., (2007) 294 ITR 121 (Mad.).
In reply to the notice dated 06.12.2012 u/s. 263 of the Act, the assessee
company submitted that both on merits as well as on technical grounds the
assessment order dated 28.12.2010 passed u/s. 143(3) of the Act by the AO
was neither erroneous nor prejudicial to the interest of the Revenue. The
assessee company relied upon various decisions in support of its contention.
The assessee company submitted that provision for warranty and liquidated
damages was in accordance with Accounting Standard 29 read with section
209 of the Companies Act, 1956 and it was not a contingent liability and it
was made in accordance with the settled law. In support, the assessee
company relied upon the following decisions :–
(i) CIT v. Vintec Corpn. (P) Ltd., (2005) 146 taxman 313 (Delhi);
(ii) Rotork Controls India P. Ltd. v. CIT, (2009) 314 ITR 62 (SC);
(iii) CIT v. Infosys Technologies Ltd, (2012) 349 ITR 610 (Karn);
(iv) CIT v. Nokia Siemens Networks India (P) Ltd., (2011) 14
Taxmann.com 84 (Kar).
The assessee company further submitted that in the earlier years , this
expenditure was claimed and allowed by the AO. Therefore, there is no
reason for taking a different view for this assessment year and it is against the
ratio laid down by the Hon’ble Bombay High Court in the case of CIT v.
Gopal Purohit, (2011) 336 ITR 237 (Bom-HC) and Hon’ble Supreme Court in
the case of Radhasoami Satsang v. CIT, (2016) 2 ITJ Online 808 (SC) :
(1992) 193 ITR 321 : (1991) 100 CTR 267 : (1992) 60 Taxman 248. The
assessee company also relied on decision of Kolkata Tribunal in the case of
Hamilton Research and Technologies (P) Ltd. v. ACIT, (2005) 142 Taxman
79 (Mag)(Kol-Trib) in support and contended that even on estimate basis if
provision for warranty was made by the assessee company following
mercantile system of accounting, the expenditure was allowable expenditure
and the assessment order cannot be treated as erroneous and prayed that the
proceedings u/s. 263 of the Act should be dropped.
5. The CIT, however, held that the AO was required to examine that
provisions made for warranty etc. was based on estimates which were realistic
and based on the past experience of the assessee company. The CIT held that
the AO was required to examine the actual outgoing during the year and that
excess provisions if any made in the earlier year was duly written back as
income in the following years, but he AO did not examine the basis for
provisions made for sales tax and excise duty liability and on what account
these provisions were justified. For claim of deduction for warranty, the AO
has not examined the contract and find out when the warranty was expiring,
the justification for allowing the provision cannot be made out. The CIT held
that the AO was required to examine the normal range of the failure of the
products of the company and in how many cases the assessee was required to
carry out repairs/replace the goods and only then the AO could decide about
the genuineness and reasonableness of the provision of warranty. However,
the AO has not considered these basic details and allowed the claim of the
assessee company in full without making these elementary inquiries and
without going into the issue as to whether any disallowance was required to
be made by the AO and if yes, as how much disallowance out of the claim for
provisions for warranty etc. should have been made, but the AO did not carry
out all these relevant inquiries. Under these circumstances, the CIT by relying
on the cases of Malabar Industrial Co. Ltd., Max India Ltd., Mangal Castings
and MEPCO Industries, (supra), treated the order passed by the AO as
erroneous and prejudicial to the interest of Revenue and set aside the
assessment order dated 28.12.2010 passed by the AO u/s. 143(3) of the Act,
by directing the AO to assess the income of the assessee in accordance with
the provisions of law after gathering all the necessary details to arrive at the
correct income after giving reasonable opportunity of being heard to the
assessee company, vide his order dated 06.02.2013 passed u/s. 263 of the Act.
6. Aggrieved by the orders dated 06.02.2013 passed u/s. 263 of the Act by the
CIT, the assessee company is in appeal before Tribunal.
7. The Ld. Counsel for the assessee company reiterated its submissions as
made before the CIT and further submitted that the CIT erroneously invoked
the provisions of Section 263 of the Act and it cannot be invoked until the
original order dated 28.12.2010 u/s. 143(3) of the Act is revised by the orders
of the Tribunal in the first round and it is only the revised order u/s. 143(3) of
Act after giving appeal effect to the orders of the Tribunal , can be subject
(2021) ABC 185
matter of revision by the CIT u/s. 263 of the Act . The Ld. Counsel submitted
that the AO has framed an assessment order dated 24.02.2014 u/s. 143(3) of
the Act read with Section 263 of the Act, in pursuance to the order dated
06.02.2013 passed by the CIT u/s. 263 of the Act, whereby disallowance for
provisions for warranty, excise duty , sales tax and liquidity damages were
made by the AO. The Ld. Counsel for the assessee company submitted that in
the first round of assessment framed u/s. 143(3) of the Act by the AO vide
orders dated 28.12.2010, the AO has not made any disallowance with regard
to provisions for warranty, excise duty , sales tax and liquidity damages while
in the second round, disallowance was made by the AO vide orders dated
24.02.2014 passed u/s. 143(3) of the Act read with Section 263 of the Act on
the following heads :–
(i) Provision for Warranty Rs. 5,53,40,000/-
(ii) Provision for Liquidity damages Rs. 9,08,90,000/-
(iii) Provision for Sales tax Rs. 2,67,00,000/-
(iv) Provision for Excise duty Rs. 43,00,000/-
The Ld. Counsel of the assessee company submitted that the assessee
company has now conceded with respect to the disallowance made by the
AO in respect of warranty, excise duty and sales tax which is not pressed
before the Tribunal while the assessee company is challenging and contesting
the additions on account of provisions for liquidated damages of Rs.
9,08,90,000/- made by the AO u/s. 143(3) of the Act read with Section 263 of
the Act, vide orders dated 24.02.2014. The Ld. Counsel of the assessee
company submitted that the original assessment order dated 28.12.2010
passed by the AO u/s. 143(3) of the Act is neither erroneous nor is prejudicial
to the interest of Revenue, as the AO had carried out necessary , proper and
detailed enquiries while framing the order dated 28.12.2010 passed u/s.
143(3) of the Act. The Ld. Counsel of the assessee company submitted that
the Tribunal in the case of Colorcraft Kashimira Ceramic Compound v. ITO,
(2007) 105 ITD 599 (Mum) partly quashed the order passed u/s. 263 of the
Act and hence the Tribunal has power to quash the order u/s. 263 of the Act
dated 06.02.2013 with respect to the directions given by CIT in setting aside
the assessment order dated 28.12.2010 and directing the AO to make
enquiries with respect to the provisions for liquidated damages while
upholding the rest of the order u/s. 263 of the Act, dated 06.02.2013 with
respect to set aside of the assessment orders dated 28.12.2010 passed u/s.
143(3) of the Act by the AO with respect to the provisions for warranty, sales
tax and excise duty. The Ld. Counsel submitted that Tribunal in the case of
K.C.P. Ltd. v. ITO, (1990) 34 ITD 50 (Hyd.)(SB) held that since there was a
breach of contract by reason of delay in performance, the damages arose at
the point of breach and at that point of time liability accrued, provision for
liquidated damages was to be allowed as deduction. The Ld. Counsel of the
assessee company contended that the assessee company has been earlier
allowed in preceding assessment year, the claim of liquiditated damages by
the Revenue and based on the principles of consistency the same should be
allowed in the current assessment year. It was also contended that no
disallowance has been made in the first round while framing of assessment
order u/s. 143(3) of the Act, dated 28.12.2010.
8. The Ld. DR, on the other hand relied upon the orders of the CIT and
submitted that the CIT has rightly invoked the provisions of Section 263 of
the Act as no enquiry was made by the AO with respect to the claim of
deduction of the assessee company with respect to the provisions for
warranty, sales tax, excise duty and liquidity damages while computing
income under the Act , made by the assessee company in the books of
accounts and as claimed as deduction from the income computed under the
Act. The Ld. DR submitted that, on perusal of the assessment order dated
28.12.2010 passed u/s. 143(3) of the Act by the AO, no enquiry has been
made by the AO and the assessment order has been passed in a routine and
perfunctory manner hence the CIT has rightly set aside the orders dated
28.12.2010 passed u/s. 143(3) of the Act by the AO.
9. We have considered the rival contentions and carefully gone through the
orders of the authorities below. We have also deliberated upon the judicial
pronouncements referred by the lower authorities and also cited by the Ld.
AR during the course of hearing before us, in the context of factual matrix of
the case. We have observed that the original assessment order was framed u/s.
143(3) of the Act vide order dated 28.12.2010. On perusal of the said
assessment order dated 28.12.2010, we have observed that the AO has not
made any enquiry with respect to the claim of deduction of the assessee
company with respect to provisions for warranty charges, excise duty, sales
tax and liquidity damages amounting to Rs. 17.72 crores claimed as deduction
by the assessee company from the income of the assessee company and the
claim made by the assessee company was accepted by the AO without any
further enquiry, examination or verification as was warranted. Further, on
perusal of the audited accounts of the assessee company reflects that the said
expenses of Rs. 17.72 crores was reflected under the head ‘other Provisions’
in Schedule 16 and Schedule 33 reflecting disclosures of ‘Provisions,
Contingent Liabilities and Contingent Assets’ in pursuance to Accounting
Standard 29. It was all the more incumbent on the AO to have made proper
and necessary enquiries , examination and verifications as the amount is
reflected under the head ‘Provisions and contingent liabilities’ as provisions
and contingent liabilities prima-facie cannot be claimed as expenses as it is
settled law under the Act that deductions while computing income under the
Act can only be claimed for known and ascertained liabilities having
crystallized during the assessment year which are incurred wholly and
exclusively for the purposes of business. Section 263 of the Act stipulates as
under:
“E. – Revision by the (Principal Commissioner or) Commissioner
Revision of orders prejudicial to revenue.
(2021) ABC 187
263. (1) The (Principal Commissioner or) Commissioner may call for and
examine the record of any proceeding under this Act, and if he considers
that any order passed therein by the (Assessing) Officer is erroneous in
so far as it is prejudicial to the interests of the revenue, he may, after
giving the assessee an opportunity of being heard and after making or
causing to be made such inquiry as he deems necessary, pass such order
thereon as the circumstances of the case justify, including an order
enhancing or modifying the assessment, or cancelling the assessment and
directing a fresh assessment.
(Explanation 1.) – For the removal of doubts, it is hereby declared that, for the
purposes of this sub-section, –
(a) an order passed (on or before or after the 1st day of June, 1988) by
the Assessing Officer shall include –
(i) an order of assessment made by the Assistant Commissioner
2(or Deputy Commissioner) or the Income Tax Officer on the basis
of the directions issued by the (Joint) Commissioner under Section
144A;
(ii) an order made by the (Joint) Commissioner in exercise of the
powers or in the performance of the functions of an Assessing
Officer conferred on, or assigned to, him under the orders or
directions issued by the Board or by the (Principal Chief
Commissioner or) Chief Commissioner or (Principal Director
General or) Director General or (Principal Commissioner or)
Commissioner authorised by the Board in this behalf under section
120;
(b) “record” (shall include and shall be deemed always to have included)
all records relating to any proceeding under this Act available at the time
of examination by the (Principal Commissioner or) Commissioner;
(c) where any order referred to in this sub-section and passed by the
Assessing Officer had been the subject matter of any appeal (filed on or
before or after the 1st day of June, 1988), the powers of the (Principal
Commissioner or) Commissioner under this sub-section shall extend (and
shall be deemed always to have extended) to such matters as had not
been considered and decided in such appeal.)
(Explanation 2. – For the purposes of this section, it is hereby declared
that an order passed by the Assessing Officer shall be deemed to be
erroneous in so far as it is prejudicial to the interests of the revenue, if, in
the opinion of the Principal Commissioner or Commissioner, –
(a) the order is passed without making inquiries or verification which
claim;
or instruction issued by the Board under Section 119; or
(d) the order has not been passed in accordance with any decision which
is prejudicial to the assessee, rendered by the jurisdictional High
Court or Supreme Court in the case of the assessee or any other
person. )
(2) No order shall be made under sub-section (1) after the expiry of two years
from the end of the financial year in which the order sought to be revised
was passed.)
(3) Not with standing anything contained in sub-section (2), an order in
revision under this section may be passed at any time in the case of an
order which has been passed in consequence of, or to give effect to, any
finding or direction contained in an order of the Appellate Tribunal,
(National Tax Tribunal,) the High Court or the Supreme Court.
Explanation. – In computing the period of limitation for the purposes of sub-
section (2), the time taken in giving an opportunity to the assessee to be
reheard under the proviso to Section 129 and any period during which any
proceeding under this section is stayed by an order or injunction of any court
shall be excluded.”
We have observed that w.e.f. 1st June, 2015 by Finance Bill 2015,
Explanation 2 to section 263 was inserted to declare the law which reads as
under :–
“(Explanation 2.—For the purposes of this section, it is hereby declared that
an order passed by the Assessing Officer shall be deemed to be erroneous in
so far as it is prejudicial to the interests of the revenue, if, in the opinion of the
Principal Commissioner or Commissioner, –
(a) the order is passed without making inquiries or verification which
claim;
or instruction issued by the Board under section 119; or
is prejudicial to the assessee, rendered by the jurisdictional High Court or
Supreme Court in the case of the assessee or any other person.)”
We would like to refer at this stage to the meaning of ‘Explanation’ as
inserted in the Act whereby the Hon’ble Supreme Court in the case of
Sundaram Pillai v. Pattabiram reported in (1985) 1 SCC 591, whereby Fazal
Ali , J culled out from earlier cases the following as objects of an explanation
to a statutory provision (Reference Page 214-215,Principles of Statutory
Interpretation by Justice G.P.Singh ,13th Ed.) :–
(a) To explain the meaning and intendment of the Act itself,
(2021) ABC 189
(b) Where there is any obscurity or vagueness in the main enactment to
clarify the same so as to make it consistent with the dominant object
which it seems to sub-serve,
(c) To provide an additional support to dominant object of the Act in
order to make it meaningful and purposeful,
(d) an Explanation cannot in any way interfere with or change the
enactment or any part thereof but where some gap is left which is
relevant for the purpose of the Explanation, in order to suppress the
mischief and advance the object of the Act if it can help or assist the
Court in interpreting the true purport and intendment of the enactment,
and
(e) It cannot, however, take away a statutory right with which any
person under a statute has been clothed or set at naught the working of an
Act by becoming an hindrance in the interpretation of the same.
It is profitable at this stage to refer to the Memorandum to Finance Bill 2015
and notes to clauses to Finance Bill, 2015 which are as under:
“Memorandum to Finance Bill 2015
Revision of order that is erroneous in so far as it is prejudicial to the
interests of revenue
The existing provisions contained in sub-section (1) of Section 263 of the
Income Tax Act provides that if the Principal Commissioner or Commissioner
considers that any order passed by the assessing officer is erroneous in so far
as it is prejudicial to the interests of the Revenue, he may, after giving the
assessee an opportunity of being heard and after making an enquiry pass an
order modifying the assessment made by the assessing officer or cancelling
The interpretation of expression “erroneous in so far as it is prejudicial to the
interests of the revenue” has been a contentious one.
In order to provide clarity on the issue it is proposed to provide that an order
passed by the Assessing Officer shall be deemed to be erroneous in so far as it
is prejudicial to the interests of the revenue, if, in the opinion of the Principal
Commissioner or Commissioner, –
claim;
(d) the order has not been passed in accordance with any decision,
Supreme Court in the case of the assessee or any other person.
This amendment will take effect from 1st day of June, 2015.”
“Notes on Clauses Finance Bill 2015
Clause 65 of the Bill seeks to amend Section 263 of the Income Tax Act
relating to revision of orders prejudicial to revenue.
The existing provisions contained in sub-section (1) of Section 263 provide
that if the Principal Commissioner or Commissioner considers that any order
passed by the assessing officer is erroneous in so far as it is prejudicial to the
interest of revenue, he may, after giving the assessee an opportunity of being
heard and after making or causing to be made an enquiry, as he deems
necessary, pass an order modifying the assessment made by the assessing
officer or cancelling the assessment and directing fresh assessment.
It is proposed to amend sub-section (1) of the aforesaid section to insert
an Explanation so as to provide that an order passed by the Assessing Officer
shall be deemed to be erroneous in so far as it is prejudicial to the interests of
the revenue, if, in the opinion of the Principal Commissioner or
Commissioner, –
claim;
is prejudicial to the assessee, rendered by the jurisdictional High Court or
Supreme Court in the case of the assessee or any other person.
This amendment will take effect from 1st June, 2015.”
Now, as can be seen above , the amendment to section 263 of the Act by
insertion of Explanation 2 to Section 263 of the Act is declaratory &
clarificatory in nature and is inserted to provide clarity on the issue as to
which orders passed by the AO shall constitute erroneous and prejudicial to
the interest of Revenue ,it is , inter-alia, provided that if the order is passed
without making inquiries or verifications by AO which, should have been
made or the order is passed allowing any relief without inquiring into the
claim; the order shall be deemed to be erroneous and prejudicial to the interest
of Revenue. The Hon’ble Supreme Court in the case of Malabar Industrial
Company Limited v. CIT, (supra) held that if the AO has accepted the entry in
the statement of account filed by the taxpayer without making enquiry , the
said order of the AO shall be deemed to be erroneous in so far as it is
prejudicial to the interest of the Revenue. In our considered opinion, the facts
of the case of the assessee company are similar to the facts in the case of
Malabar Industrial Co. Limited, (supra) whereby no enquiry/verification is
made by the AO whatsoever with respect to claim of deduction of Rs. 17.72
crores with respect to the provisions for warranty, excise duty , sales tax and
liquidated damages. Moreover, now Explanation 2 to Section 263 of the Act
(2021) ABC 191
is inserted in the statute which is declaratory and claraficatory in nature to
declare the law and provide clarity on the issue whereby if the AO failed to
make any enquiry or necessary verification which should have been made, the
order becomes erroneous in so far as it is prejudicial to the interest of revenue.
A proviso added from 01.04.1988 to Section 43B of the Act from 01.04.1984
came up for consideration in Allied Motors Private Limited v. CIT, (1997) 91
taxman 205 (SC) before Hon’ble Supreme Court and it was given
retrospective effect from the inception of the section on the reasoning that the
proviso was added to remedy
unintended consequences and supply an obvious omission so that the section
may be given a reasonable interpretation and that in fact the amendment to
insert the proviso would not serve its object unless it is construed as
retrospective . In CIT v. Podar Cement Pvt. Limited, (2016) 1 ITJ Online 956
(SC) : (1997) 226 ITR 625 : (1997) 141 CTR 67 : (1997) 92 Taxman 541, the
Hon’ble Supreme Court held that amendment introduced by the Finance Act,
1987 in so far the related to Section 27(iii), (iiia) and (iiib) which redefined
the expression ‘owner of house property’, in respect of which there was a
sharp divergence of opinion amongst the High Courts, was clarificatory and
declaratory in nature and consequently retrospective. Similarly, in Brij Mohan
Das Laxman Das v. CIT, (2016) 2 ITJ Online 763 (SC) : (1997) 223 ITR
825 : (1997) 138 CTR 214 : (1997) 90 Taxman 41, explanation 2 added to
Section 40 of the Act was held to be declaratory in nature and, therefore,
retrospective. (Reference Page 569-570, Principles of Statutory Interpretation
by Justice G.P. Singh ,13th Ed.).
In our considered view, the CIT has rightly invoked the provisions of section
263 of the Act as the AO failed to make proper enquiry, examination and
verifications as warranted for the proper completion of the assessment, with
respect to claim of deduction of Rs. 17.72 crores with respect to the
provisions for warranty, excise duy, Sales Tax and liquidated damages.
Regarding the contentions of the assessee company that the CIT should have
set aside the orders passed by the AO after giving appeal effect to the orders
of the tribunal in the first round has to be rejected as the basic facts remains
that the AO has not made any enquiry, examination or verification of the
claim of the assessee company with respect to claim of deduction of provision
of Rs 17.72 crores with respect to provisions for warranty, sales tax, excise
duty and liquidated damages , the order of the Tribunal would have
adjudicated issues arising out of the orders of the authorities below whereby
the facts still remains that the AO has not made any enquiry, examination or
verification of the claim of the assessee company with respect to claim of
deduction of provision of Rs 17.72 crores with respect to provisions for
warranty, sales tax, excise duty and liquidated damages. The order of the
Tribunal in the first round of litigation has not been incidentally enclosed by
the assessee company in the documents/paper book filed with the Tribunal. It
is an established principle under the Act that provisions and contingent
expenses are not allowed as deduction while computing the income of the
assessee. It is only an ascertained liability which has crystallized during the
year and which is wholly and exclusively incurred for the purpose of business
of the assessee company , is allowed as deduction while computing income
under the Act. The AO was under duty to make necessary and proper enquiry,
examination and verification’s with respect to Provisions of Rs. 17.72 crores
with respect to the claim of deduction of the assessee company for provisions
for liquidity damages, warranty, sales tax and excise duty, while on perusal of
the assessment orders u/s. 143(3) of the Act dated 28.12.2010 and other
documents filed before us, we have observed that the AO has not made any
enquiry whatsoever with respect to the claim of deduction of expenses of Rs.
17.72 crores towards Provision for Warranty, Sales tax and excise duty and
liquidated damages claimed by the assessee company while computing the
income of the assessee company and the claim of the assessee company was
accepted without any inquiry, examination or verification whatsoever by the
AO and In the absence thereof of enquiry, examination and verification of the
claim of the asssesee company for deduction of provisions for Warranty,
Sales tax and excise duty and liquidated damages amounting to Rs. 17.72
crores, we find no infirmity in the order dated 06.02.2013 of the CIT passed
u/s. 263 of the Act setting aside the assessment order dated 28.12.10 passed
u/s. 143(3) of the Act as erroneous in so far as prejudicial to the interest of
the Revenue and directing the AO to assess the income of the assessee
company after making necessary enquiries, examination and verifications,
which order of the CIT dated 06.02.2013, we uphold . We order accordingly.
10. In the result, the appeal of the assessee company is dismissed.
ITA No. 2836/Mum/2014 for A.Y. 2007-08.
11. This appeal filed by the assessee company is arising out of the orders u/s.
143(3) read with Section 263 of the Act dated 24.02.2014 passed by the AO
in pursuance to the order dated 06.03.2013 passed u/s. 263 of the Act.
12. The assessee company has raised the following grounds of appeal in the
memo of appeal filed with the Tribunal :–
“1. Disallowance of claim for Deduction of Liquidated Damages of
Rs. 9,08,90,000/-
(a) The Ld. AO erred in law and on facts in disallowing the claim for
deduction for expenditure/loss in respect of liquidated damages of Rs.
9,08,90,000 by carrying out direction of CIT in his order dt. 06.02.2013
passed u/s. 263 without applying his mind to the facts of the case.
(b) Your appellant submits that :
(i) During the year the company had accounted for expenses/loss on,
liquidated damages amounting to Rs. 9,08,90,000/- towards delayed
expectation of contracts which were executed by the company beyond
the agreed delivery dates and the compensation payable by the company
for delay was computed in a reasonable and prudent manner based on
(2021) ABC 193
past experience of the company and the company has a policy to write
back the unused amounts and offer the same for taxation on expiry of the
relevant period for claim of damages and there is no leakage of revenue
as the company is being taxed at a flat rate of 30%.
(ii) The claim under consideration were quantified and accounted by
following the sound accounting principles and the policies followed were
mandated by Accounting Standard 29 of the ICAI r.w.s. 209 of the
Companies Act.
(c) Your appellant pleads that appellant's claim for deduction on account of
liquidated damages of Rs. 9,08,90,000/- be allowed.
2. Disallowance of claim for Deduction for Expenses on Account of Sales
Tax of Rs. 2.67.00,000/-
(a) The Ld. AO erred in law and on facts in disallowing the claim for
deduction for expenditure on sales tax of Rs. 2,67,00,000/- by carrying
out the directions of the CIT, without application of mind, issued while
passing order dt. 06.02.2013 u/s. 263 of the Act.
(b) Your appellant submits that during the year the company has accounted
for sales tax amounting to Rs. 2,67,00,000/- representing sales tax
liability on account of non- collection of declaration forms under the
Act/Rules which expenses under consideration was quantified and
accounted by following the sound accounting principles and the policies
followed were mandated by Accounting Standard 29 of the ICAI r.w.s.
209 of the Companies Act.
(c) Your appellant pleads that appellant’s claim for deduction on account of
sales tax of Rs. 2,67,00,000 be allowed.
3. Disallowance of claim for Deduction for Expenses on Account of Excise
Duty of Rs. 43,00,000/-.
(a) The Ld. AO. erred in law and on facts in disallowing the claim for
deduction for expenditures in respect of excise duty of Rs. 43,00,000/-
without application of mind by carrying out the directions of the CIT
vide his order dt. 06.02.2013 passed u/s. 263 of the Act.
(b) Your appellant submits that during the year the company has accounted
for excise duty amounting to Rs. 43,00,000/- representing the differential
duty liability that has materialized in respect of matters contested in
appeal and the expenses under consideration were quantified and
accounted by following the sound accounting principles and the policies
followed were mandated by Accounting Standard 29 of the ICAI r.w.s.
209 of the Companies Act.
(c) Your appellant pleads that appellant's claim for deduction on account of
excise duty of Rs. 43,00,000/- be allowed.
4. Levy of Interest u/s. 234 D
(a) The Ld. AO. erred in law and on facts in levying interest u/s. 234D of Rs.
37,93,211/- without giving any opportunity of hearing and further erred
in law in not passing any speaking order for the levy of interest.
(b) Your appellant denies any liability of payment of interest and further
submits that the interest was charged in violation of the provision of
Natural Justice in as much as no opportunity for hearing was given.
(c) Your appellant pleads that the interest levied be deleted.
5. Serious Violation of Natural Justice
(a) The Ld. AO erred in law and on facts in completing the proceedings in a
complete haste and without giving sufficient time and opportunity and
erred in law in ignoring all the evidences and proofs and documents
available on records. Further erred in treating the order passed by AO as
erroneous and prejudicial to the interest of the revenue and setting aside
the same without bringing any material of whatsoever nature in record.
(b) Your appellant submits that proper procedure as required by law was not
followed before passing of order.
(c) Your appellant pleads that an assessment made in violation of the
provisions of natural justice be quashed.
(a) Order Passed in Pursuance of an invalid order u/s. 263
The Ld. AO erred in law and facts of the case in passing an order dt.
24.02.2014 to give effect to an order u/s. 263 dt. 06.02.2013 ignoring the
fact that the order passed by the Ld. AO u/s. 143(3) dt. 28.12.2010 was
neither erroneous nor prejudicial to the interest of the revenue in as much
as the Ld. AO had applied his mind and had made proper inquiries to the
satisfaction before passing the assessment order.
(i) The Ld. AO had completed the assessment for A.Y. 2007-08 vide his
order dt. 28.12.2010 after detailed inquiry and appreciation of the facts,
evidences and the law. The provisions made on account of liquidated
damages, sales tax and excise duty represented lawful business
expenditures of the company and provisions were made in accordance
with AS 29 of the ICAI and were allowed by the AO only after due
consideration of the fact and of the law of allowability of such expenses
and in that view of the matter the order could not have been termed as
erroneous or prejudicial to the interest of the law.
(ii) The company had made complete disclosure of the facts in its
financial statements which are duly audited, under schedule 16 and
particularly vide Note no.33 of schedule B of Notes to accounts. The
adequacy of the provisions and the need and the justification thereof was
ascertained by the auditors and was approved by them without any
qualifications in their report.
(2021) ABC 195
(C) Your appellant pleads that the order dt. 24.02.2014 passed by Ld AO u/s.
143(3) r.w.s. 263 be held to be bad in law and be quashed.”
13. We have observed that the AO has passed an order dated 24.02.2014 u/s.
143(3) of the Act read with Section 263 of the Act, in pursuance to the
directions vide order dated 06-02-2013 of the CIT u/s. 263 of the Act. We
have observed that the assessee company has preferred an first appeal directly
before the Tribunal against the order dated 24.02.2014 passed u/s. 143(3) read
with Section 263 of the Act. A bare perusal of section 253(1) of the Act will
reveal that following appeals can be filed before the Tribunal :–
“Appeals to the Appellate Tribunal.
253. (1) Any assessee aggrieved by any of the following orders may appeal to
the Appellate Tribunal against such order –
(a) an order passed by a (Deputy Commissioner (Appeals)) (before the
1st day of October, 1998) (or, as the case may be, a Commissioner
(Appeals)) under (***) (Section 154), (***) Section 250, (Section 271,
Section 271A or Section 272A); or
(b) an order passed by an Assessing Officer under clause (c) of Section
158BC, in respect of search initiated under Section 132 or books of
account, other documents or any assets requisitioned under Section
132A, after the 30th day of June, 1995, but before the 1st day of January,
1997; or)
(ba) an order passed by an Assessing Officer under sub-section (1) of
Section 115VZC; or)
(c) an order passed by a (Principal Commissioner or) Commissioner
(under Section 12AA (or under clause (vi) of sub-section (5) of Section
80G) or) under Section 263 (or under Section 271) (or undersection
272A) (***) or an order passed by him under Section 154 amending his
order under Section 263) (or an order passed by a (Principal Chief
Commissioner or) Chief Commissioner or a (Principal Director General
or) Director General or a (Principal Director or) Director under Section
272A; (or))
(d) an order passed by an Assessing Officer under sub-section (3), of
Section 143 or Section 147 (Or Section 153A or Section 153C) in
pursuance of the directions of the Dispute Resolution Panel or an order
passed under Section 154 in respect of such order;)
(e) (***)
Following clause (e) shall be inserted after clause (d) of sub-section (1)
of Section 253 by the Finance Act, 2013, w.e.f. 01.04.2016 :
(e) an order passed by an Assessing Officer under sub-section (3) of
Section 143 or Section 147 or Section 153A or Section 153C with the
approval of the 33(Principal Commissioner or)Commissioner as referred
to in sub-section (12) of Section 144BA or an order passed under Section
154 or Section 155 in respect of such order;
(f) an order passed by the prescribed authority under sub-clause (vi)or
sub-clause (via)of clause (23C)of Section 10.)”
We have observed that an appeal arising from the order u/s. 143(3) of the Act
read with Section 263 of the Act does not find place in section 253(1) of the
Act with respect to the appeal against the orders passed u/s. 143(3) of the Act
read with Section 263 of the Act .
However, on a perusal of section 246A of the Act, we have observed that
appeals against the orders passed u/s. 143(3) of the Act shall lie with the
Commissioner of Income Tax(Appeals) (hereinafter called “the CIT(A)”) .
The Section 246A of the Act reads as under :–
“ Appealable orders before Commissioner (Appeals).
246A. (1) Any assessee 39(or any deductor) 39a(or any collector) aggrieved
by any of the following orders (whether made before or after the appointed
day) may appeal to the Commissioner (Appeals) against –
(a) an order (passed by a Joint Commissioner under clause (ii) of sub-
section (3) of Section 115VP or an order) against the assessee where the
assessee denies his liability to be assessed under this Act or an intimation
under sub-section (1) or sub-section (1B) of (Section 143 or (sub-section
(1) of Section 200A or sub-section (1) of Section 206CB, where the
assessee or the deductor or the collector) objects) to the making of
adjustments, or any order of assessment under sub-section (3) of Section
143 (except an order passed in pursuance of directions of the Dispute
Resolution Panel (***) (or an order referred to in sub-section (12) of
Section 144BA)) or Section 144, to the income assessed, or to the
amount of tax determined, or to the amount of loss computed, or to the
status under which he is assessed;
(a.a) an order of assessment under sub-section (3) of Section 115WE or
Section 115WF, where the assessee, being an employer objects to the
value of fringe benefits assessed;
(a.b) an order of assessment or reassessment under section 115WG;)
(b) an order of assessment, reassessment or re-computation under
section 147 (except an order passed in pursuance of directions of the
Dispute Resolution Panel (***) (or an order referred to in sub-section
(12) of Section 144BA)) or Section 150;
(b.a) an order of assessment or reassessment under section 153A (except
an order passed in pursuance of directions of the Dispute Resolution
Panel) (***) (or an order referred to in sub-section (12) of Section
144BA);
(b.b) an order of assessment or reassessment under sub-section (3) of
Section 92CD;
(2021) ABC 197
(c) an order made under section 154 or Section 155 having the effect of
enhancing the assessment or reducing a refund or an order refusing to
allow the claim made by the assessee under either of the said sections
(***) (except an order referred to in sub-section
(12) of Section 144BA);
(d) an order made under Section 163 treating the assessee as the agent of
a non-resident;
(e) an order made under sub-section (2) or sub-section (3) of Section
170;
(f) an order made under Section 171;
(g) an order made under clause (b) of sub-section (1) or under sub-
section (2) or sub-section (3) or sub-section (5) of Section 185 in respect
of an assessment for the assessment year commencing on or before the
1st day of April, 1992;
(h) an order cancelling the registration of a firm under sub-section (1) or
under sub-section (2) of Section 186 in respect of any assessment for the
assessment year commencing on or before the 1st day of April, 1992 or
any earlier assessment year;
(h.a) an order made under Section 201;)
(h.b) an order made under sub-section (6A) of Section 206C;)
(i) an order made under Section 237;
(j) an order imposing a penalty under –
(A) Section 221; or
(B) Section 271, Section 271A, 58 (Section 271AAA,) 59 (Section
271AAB,) Section 271F, 60 (Section 271FB,) Section 272AA or
Section 272BB;
(C) Section 272, Section 272B or Section 273, as they stood
immediately before the 1st day of April, 1989, in respect of an
assessment for the assessment year commencing on the 1st day of
April, 1988, or any earlier assessment years;
(j.a) an order of imposing or enhancing penalty under sub-section (1A) of
Section 275;
(k) an order of assessment made by an Assessing Officer under clause
(c) of Section 158BC, in respect of search initiated under Section 132 or
books of account, other documents or any assets requisitioned under
Section 132A on or after the 1st day of January, 1997;
(l) an order imposing a penalty under sub-section (2) of section
158BFA;
(m) an order imposing a penalty under Section 271B or Section 271BB;
(n) an order made by a Deputy Commissioner imposing a penalty
under Section 271C62 (Section 271CA), Section 271D or Section 271E;
(o) an order made by a Deputy Commissioner or a Deputy Director
imposing a penalty under Section 272A;
(p) an order made by a Deputy Commissioner imposing a penalty under
Section 272AA;
(q) an order imposing a penalty under Chapter XXI;
(r) an order made by an Assessing Officer other than a Deputy
Commissioner under the provisions of this Act in the case of such person
or class of persons, as the Board may, having regard to the nature of the
cases, the complexities involved and other relevant considerations,
direct.”
On perusal of Section 246A of the Act, we have observed that appeal against
the orders passed u/s. 143(3) read with Section 263 of the Act shall lie with
the CIT(A)
u/s. 246A(1)(a) of the Act being an order passed by learned assessing officer
u/s. 143(3) of the Act.
Appeal under the Act is a statutory right which emanates only from the
statute. The assessee does not have a vested right to appeal unless provided
for in the statute. Reference is drawn to the decision of Hon’ble Supreme
Court in the case of CIT v. Ashoka Engineering Co., (1992) 194 ITR 645 (SC)
whereby the Hon’ble Supreme Court held that :
“7. We have heard the counsels for both the parties. The question at issue
is regarding a right of appeal. It is true that there is no inherent right of
appeal to any assessee and that it has to be spelt from the words of the
statute, if any, providing for an appeal. But it is an equally well-settled
proposition of law that, if there is a provision conferring a right of
appeal, it should be read in a reasonable, practical and liberal manner.”
Hence, in our considered view , this instant appeal bearing ITA No.
2836/Mum/2014 cannot be adjudicated by the Tribunal as the first appeal
against the orders dated 24.02.2014 passed by the AO u/s. 143(3) of the Act
read with Section 263 of the Act shall lie and fall with in the jurisdiction of
the CIT(A) u/s. 246A(1)(a) of the Act. We have observed that the first appeal
is filed directly by the assessee company in ITA No. 2836/Mum/2014 before
the Tribunal, which the Tribunal is not competent to adjudicate as per
provisions of Section 253(1) of the Act because the first appeal lie’s before
the CIT(A) u/s. 246A(1)(a) of the Act and hence the appeal filed by the
assessee company is hereby dismissed. However, the assessee company is at
liberty to file an appeal before the CIT(A) u/s. 246A(1)(a) of the Act for
adjudication on merits. The CIT(A) shall consider the relevant fact that in the
intervening period the assessee company was pursuing the appeal with the
Tribunal albeit at wrong forum with the Tribunal instead of filing the first
appeal with the CIT(A) as provided u/s. 246A(1)(a) of the Act , which
relevant fact shall be considered liberally by the CIT(A) while adjudicating
the condonation application, if
(2021) ABC 199
filed by the assessee company , while adjudicating the appeal on merits . We
order accordingly.
14. In the result, the appeals filed by the assessee company in ITA no.
2836/Mum/2014 is dismissed.
15. In the result, both the appeals filed by the assessee company are
dismissed.
16. Order pronounced in the open court on 1st February, 2016.
______________
(2019) 7 ITJ Online 298 (Trib.-Mumbai)

Anraj Hiralal Shah (HUF)
v.
Income Tax Officer
Shri B.R. Baskaran, AM
ITA No. 4514/Mum/2018
16th July,2019
Exemptions-S.10(38) of Income Tax Act,1961-The AO, after discussing the
modus operandi adopted for booking long term capital gain by rigging the
prices, came to the conclusion that the transactions of purchase and sale made
by the assessee are not genuine. The assessee submitted that he had earned
speculation profit in the financial year relevant to the Assessment Year 2013-
14 and used the same for purchase of shares. The AO disbelieved the contract
notes relating to speculation profit. Since there was unusual rise in the prices
of shares of M/s Sunrise Asian Ltd, the AO took the view that the genuineness
of transactions of sale is also in doubt. Accordingly he rejected the claim of
capital gains and assessed the net sale consideration of Rs. 9,73,927/- as
income of the assessee u/s. 68 of the Act. The AO also added 2% of the sale
consideration as expenses incurred by the assessee in procuring long term
capital gain entries. The Ld. CIT(A) gave partial relief by sustaining addition
to the extent of net gains made by the assessee-Held-In the absence of any
evidence to implicate the assessee or to prove that the transactions are bogus,
I am of the view that the capital gains declared by the assessee cannot be
doubted with. In that view of the matter, the addition made towards expenses
is not also sustainable
Final outcome – Appeal Allowed

Relevant Provisions : S.10(38) of Income tax Act,1961
CIT v. Smt. Pooja Agarwal (D.B. Income Tax Appeal No. 385/2011 dated
11.09.2017) [Refer Para 6]
Counsel :
– Neelkanth Khandelwal, for the Appellant;
– Chaitnya Anjaria, for the Respondent.
ORDER
Per B.R. Baskaran, AM
1. The appeal of the assessee is directed against the order dated 04.05.2018
passed by Ld. CIT(A)-51, Mumbai and it relates to the Assessment Year
2014-15. The assessee is aggrieved by the decision of Ld. CIT(A) in partially
confirming addition relating sale of shares made by the AO rejecting the
claim of capital gains.
2. The facts of the case are that the assessee filed his return of income
declaring capital gains and income from other sources. The assessee had
declared long term capital gain of Rs. 8,40,497/ and claimed the same as
exempt u/s. 10(38) of the Act. The assessee had sold 2200 shares of M/s
Sunrise Asian Ltd (formerly Santoshi Maa Tradelinks Ltd before
amalgamation) for a value of Rs. 9,73,927/- in May, 2013. The assessee had
purchased the above said shares in April 2012 for a consideration of Rs.
1,33,430/-. The AO received information from investigation wing that the
trading in shares of Sunrise Asian Ltd falls under the category of suspicious
long term capital gains on shares. Accordingly he reopened the assessment of
the year under consideration. One of the directors of M/s Sunrise Asian Ltd
had admitted before the revenue that the prices of shares have been rigged.
The AO, after discussing the modus operandi adopted for booking long term
capital gain by rigging the prices, came to the conclusion that the transactions
of purchase and sale made by the assessee are not genuine. The assessee
submitted that he had earned speculation profit in the financial year relevant
to the Assessment Year 2013-14 and used the same for purchase of shares.
The AO disbelieved the contract notes relating to speculation profit. Since
there was unusual rise in the prices of shares of M/s Sunrise Asian Ltd, the
AO took the view that the genuineness of transactions of sale is also in doubt.
Accordingly he rejected the claim of capital gains and assessed the net sale
consideration of Rs. 9,73,927/- as income of the assessee u/s. 68 of the Act.
The AO also added 2% of the sale consideration as expenses incurred by the
assessee in procuring long term capital gain entries.
3. The Ld. CIT(A) gave partial relief by sustaining addition to the extent of
net gains made by the assessee. In addition to the reasoning given by the AO,
the Ld. CIT(A) also observed that the speculation profit was earned by the
assessee from some other broker, while the shares were claimed to have been
purchased from M/s Eden Financial Services Ltd.
4. The Ld. AR submitted following points:–
(2021) ABC 201
(a) The Ld. CIT(A) was not right in observing that the assessee had earned
speculation profit from some other broker. Inviting our attention to the
copies of financial statements furnished for Assessment Year 2013- 14,
the Ld. AR submitted that the assessee has earned speculation profits
from two brokers in that year, one of which is M/s Eden Financial
Services Ltd, from whom the shares were purchased against the
speculation profit.
(b) The brokers from whom the assessee had purchased shares and through
whom the assessee sold shares have not been identified as tainted
brokers.
(c) The purchase of shares and the source of purchases have been accepted by
the assessing officer in the preceding year.
(d) The shares have been received in d-mat account of the assessee and they
have been sold through the d-mat account only.
Accordingly the Ld. AR submitted that the assessing officer has disbelieved
the transactions for the reason that the there is huge jump in the prices of
shares in view of alleged rigging of prices by the directors of the above said
company. He submitted that the AO has not established any link between the
assessee and the directors of the company. Accordingly he submitted that the
assessee has purchased and sold the shares in the normal course. Accordingly
he submitted that there is no reason to suspect the transactions of the assessee.
5. On the contrary, the Ld. DR submitted that the investigation wing of the
department has unearthed huge racket of rigging of prices of the shares with
the fraudulent motive of generating tax exempt capital gains. The revenue has
identified suspicious share transactions and the shares of M/s Sunrise Asian
Ltd. were one of such shares. He submitted that the directors of the above said
company has admitted the price rigging. Accordingly he submitted that the
Ld. CIT(A) was justified in confirming the addition.
6. The Ld. AR, in the rejoinder, submitted that the assessing officer has made
the addition u/s. 68 of the Act, while the assessee has offered the gain as long
term capital gain. However, the AO has assessed entire sale consideration as
income. He submitted that the Hon’ble Rajasthan High Court has upheld the
order of Tribunal in deleting an identical addition in the case of CIT v. Smt.
Pooja Agarwal (D.B. Income Tax Appeal No. 385/2011 dated 11.09.2017),
since the shares were transacted through Stock Exchange. He submitted that
the assessee, in the instant case also, has transacted the purchase and sale
transactions through stock exchange only. He further submitted that the
assessee has purchased and sold shares of other companies also, which is
evident from the d-mat statement.
7. I have heard rival contentions and perused the record. I notice that the AO
has received information about suspicious share transactions and on the basis
of the same; he has disbelieved the claim of long term capital gains. I notice
that the assessee has purchased shares through a broker named M/s Eden
Financial Services and sold shares through Intime Equities Ltd. Thus, I notice
that the purchase and sale of shares have been carried out through two
different brokers. It is not the case of the AO that both the share brokers
referred above have been identified as tainted brokers involved in fraudulent
transactions.
8. The assessee has earned speculation profit in the immediately preceding
year through M/s Eden Financial Services also and the said profit has been
used to purchase the shares of M/s Sunrise Asian Ltd. The assessee has
offered the speculation profit for income tax purposes in the immediately
preceding year and it has been accepted. Further the assessee has shown the
purchase of impugned shares as investment in the Balance Sheet. Hence the
purchase of shares has been accepted. Further the shares have been received
in the D-mat account of the assessee and they have been sold through the D-
mat account only. Hence the delivery of shares also stand proved. The AO has
not brought any material on record to show that the assessee was part of
fraudulent price rigging. Accordingly, in the absence of any evidence to
implicate the assessee or to prove that the transactions are bogus, I am of the
view that the capital gains declared by the assessee cannot be doubted with. In
that view of the matter, the addition made towards expenses is not also
sustainable.
9. Accordingly, I set aside the order passed by Ld. CIT(A) on both the issues
and direct the AO to delete both the additions.
11. Order pronounced on 16.07.2019
___________
(2019) 7 ITJ Online 299 (Trib.-Delhi)

In the ITAT, Delhi Bench
Smt. Manita
v.
Shri Bhavnesh Saini, JM, and DR. B.R.R. Kumar, AM
ITA.No. 3432/Del/2019
12th July,2019
Revisional Jurisdiction Commissioner- S.263 of Income Tax Act,1961-
Income from Long Term Capital Gains-Scrutiny Assessment-S.143(3) of
Income Tax Act,1961-Examination of Record by the Commissioner- Findings
incomplete Assesment By AO-Appeal Preferred against the proceedings U/s.
263 of Income Tax Act,1961- that assessee has earned long term capital gains
of Rs. 70,90,508/- on sale of 4200 shares of M/s. Turbotech Engineering Ltd.,
in assessment year under appeal which is claimed exempt under Section
(2021) ABC 203
10(38) of the IT Act. The AO failed to make enquiries from share broker,
bank etc., and the Company for whom shares were purchased. The AO
also did not make any enquiry with regard to investment of Rs. 72,00,000/-
with M/s. Mohit Ispat (P) Ltd., and A.O. has also failed to examine the issue
of incurring of Rs. 10,78,472/- towards construction of home. Ld. Pr. CIT,
therefore, found the assessment order to be erroneous and prejudicial to the
interests of the Revenue. The explanation of assessee was called for. The
assessee filed detailed written submissions before Ld. Pr. CIT which is
reproduced in the impugned order in which the assessee highlighted that
detailed replies along with documentary evidences were filed before AO on
the issues time to time which have been examined by the AO-Held-It appears
that AO has taken one of permissible view in the matter as per Law and if the
Ld. Pr. CIT does not agree with the view of the AO, the assessment order
could not be treated as erroneous in so far as it is prejudicial to the interests of
the Revenue. Considering the totality of the facts and circumstances noted
above in the light of material on record, we are of the view that it is not a case
of inadequate or no enquiry, thus, Explanation-2 to Section 263 of the IT Act
would not be attracted in the matter. In this view of the matter, the assessment
order could not be held to be erroneous in so far as it is prejudicial to the
interests of the Revenue. We, accordingly, set aside the impugned order under
Section 263 of the IT Act and restore the assessment order.

CIT v. Gabriel India Ltd., (2016) 1 ITJ Online 948 (Bombay) : (1993) 203
ITR 108 : (1993) 114 CTR 81 : (1993) 71 Taxman 585 (Refer Para 4)
CIT v. Sunbeam Auto Ltd., (2016) 2 ITJ Online 766 (Delhi) : (2011) 332
ITR 167 : (2009) 227 CTR 133 : (2010) 189 Taxman 436 (Refer Para 4)
D.G. Housing Projects Ltd., (2016) 2 ITJ Online 776 (Delhi) : (2012) 343
ITR 329 : (2013) 212 Taxman 132 (Refer Para 4)
Counsel :
– Ms. Rano Jain, and Venkatesh Chaurasia, for the Assessee;
– Sanjay Shivam, for the Revenue.
ORDER
Shri Bhavnesh Saini, JM.
1. This appeal by Assessee has been directed against the Order of the Ld. Pr.
CIT, Muzaffarnagar, Dated 18.03.2019, under section 263 of the IT Act,
1961, for the Assessment Year 2014-2015.
2. Brief facts of the case are that assessee is an individual and nature of
business as shown in the assessment order is “Income from Long Term
Capital Gains on Shares”. In this case, return of income was filed on
31.03.2005 showing income of Rs. 5,25,960/-. The case was selected for
scrutiny under CASS for reasons of suspicious long term capital gains on
shares. Statutory notices were issued time to time. Assessee attended the
proceedings before AO filed written submissions along with copy of
computation of income, audit report, Trading & Profit & Loss Account &
Balance-sheet. The AO noted that in response to the notice issued, assessee
has furnished written submissions along with copy of Demat A/c, source of
investment in shares, bank account, copy of share certificates, copy of account
of Mathiyan Construction and same is taken on record. The AO after
discussing the case with the Assessee’s Counsel, completed the assessment at
returned income vide Order dated 22.12.2016 under Section 143(3) of the IT
Act, 1961.
3. The Ld. Pr. CIT on examination of the record found that AO has
completed the assessment without examining the case properly. Therefore,
notice under section 263 of the IT Act was issued on 29.01.2019 (PB-45)
which is also reproduced in the impugned order in which it was stated that
assessee has earned long term capital gains of Rs. 70,90,508/- on sale of 4200
shares of M/s. Turbotech Engineering Ltd., in assessment year under appeal
which is claimed exempt under Section 10(38) of the IT Act. The AO failed to
make enquiries from share broker, bank etc., and the Company for whom
shares were purchased. The AO also did not make any enquiry with regard
to investment of Rs. 72,00,000/- with M/s. Mohit Ispat (P) Ltd., and A.O. has
also failed to examine the issue of incurring of Rs. 10,78,472/- towards
construction of home. Ld. Pr. CIT, therefore, found the assessment order to be
erroneous and prejudicial to the interests of the Revenue. The explanation of
assessee was called for. The assessee filed detailed written submissions before
Ld. Pr. CIT which is reproduced in the impugned order in which the assessee
highlighted that detailed replies along with documentary evidences were filed
before AO on the issues time to time which have been examined by the AO
Therefore, there is no case of failure to make any enquiry at the assessment
stage. The assessee relied upon several decisions in support of the contention.
Ld. Pr. CIT, however, found that Order have been passed without making
proper enquiry on the above issues despite case was selected for scrutiny.
Hence, the case is covered by Clause (a) of Explanation-2 of Section 263(1)
of the IT Act. Ld. Pr. CIT also noted that report of Investigation Wing were
not utilized by the AO Further, AO did not make any enquiry on the issues
stated in the notice. Therefore, assessment order was set aside with a direction
to the AO to pass assessment order afresh in accordance with the provisions
of Law.
4. The assessee is in appeal challenging the impugned order under section
263 of the IT Act. learned Counsel for the Assessee reiterated the submissions
made before the Ld. Pr. CIT. learned Counsel for the Assessee submitted that
(2021) ABC 205
all the three issues on which proposed action under Section 263 have been
taken, all these issues have been duly examined by the A.O. and assessment
order have been rightly made. The assessee has given details of sale and
purchases in the return of income on the issue of capital gains earned on sale
of shares. The A.O. issued questionnaire on the issue which is duly replied by
assessee supported by bank statements and other materials. The assessee also
filed details and evidences, sale and purchase of shares, supported by copy of
the receipt for purchase of shares, copy of account in the books of the broker
through whom the sales were made, copy of contract note and certificate of
the broker. The assessee also filed reply supported by cash flow statement and
cash book to prove source of construction, copy of the Demat account was
also filed along with copy of account in Mathiyan Construction in which the
assessee is a partner to prove the source of purchases on shares. In the cash
flow and cash book of the entries of investment with M/s. Mohit Ispat (P)
Ltd., and amount incurred towards construction have been explained. The
assessee also filed copy of the share certificates, bank accounts and other
details to show that all the three issues have been examined by the AO with
reference to the evidences and material on record. Learned Counsel for the
Assessee submitted that since due enquiries have been made by the AO but
the Pr. CIT is trying to impose her view on the plausible view taken by the
A.O. which is not permissible under the Law. She has relied upon CIT v.
Sunbeam Auto Ltd., (2016) 2 ITJ Online 766 (Delhi) : (2011) 332 ITR 167 :
(2009) 227 CTR 133 : (2010) 189 Taxman 436 learned Counsel for the
Assessee also relied upon Judgment of Hon’ble Bombay High Court in the
case of CIT v. Gabriel India Ltd., (2016) 1 ITJ Online 948 (Bombay) : (1993)
203 ITR 108 : (1993) 114 CTR 81 : (1993) 71 Taxman 585. She has also
submitted that Ld. Pr. CIT has invoked Explanation-2 to Section 263 of the IT
Act which cannot be invoked in the case of inadequate enquiry and also this
Explanation is applicable w.e.f. Assessment Year 2015-2016 and hence, not
applicable to assessment year under appeal. Learned Counsel for the Assessee
also submitted that Ld. Pr. CIT has failed to point out any error in the order of
the AO and she herself did not make any enquiry, therefore, impugned order
cannot be sustained in Law. She has relied upon decision in the case of ITO v.
ITR 329 : (2013) 212 Taxman 132. Learned Counsel for the Assessee,
therefore, submitted that impugned order is liable to be set aside.
5. On the other hand, Ld. DR relied upon the impugned order of the Ld. Pr.
CIT passed under Section 263 of the IT Act and also submitted that AO did
not examine all the above issues and passed a brief order. The report of
Investigation Wing have not been considered by the AO.
6. We have considered the rival submissions and perused the material on
record. The AO in this case passed the assessment order under Section 143(3)
because the case was selected for scrutiny for the reasons of suspicious long
term capital gains on shares. The AO called for explanation of assessee and
assessee filed reply time to time which are part of the record. The explanation
of assessee is supported by all the evidences and material on record as to how
the assessee has entered into sale and purchase of shares and how the sale
consideration have been received by assessee through banking channel. The
transaction was conducted through the Demat account. The AO after making
a deep investigation into the issue of long term capital gains also noted in the
assessment order that written submissions of the assessee along with copies of
Demat account, source of investment in shares, bank account, copies of share
certificates, copy of account of Mathiyan Construction are placed on record. It
would, therefore, prove that AO examined the issue of long term capital gains
with reference to sale of shares at assessment stage in the light of evidence
and material on record. Thus the reasons for which the case was selected for
scrutiny have been satisfied by the AO learned Counsel for the Assessee has
pointed out several documents in the paper book to show that on the issue of
long term capital gains, AO raised a query to the assessee which is duly
responded by assessee supported by all the documentary evidences. The
assessee also filed copies of bank statement, cash flow and cash book to prove
availability of funds with the assessee to make investment with M/s. Mohit
Ispat (P) Ltd., and expenses incurred for construction of home. All these
documentary evidences were before AO. Thus, it is not a case of even
inadequate enquiry or improper enquiry as is alleged in the show cause notice
under Section 263 of the IT Act. It is merely stated in the notice under Section
263 of the IT Act that AO failed to make enquiry on these aspects. However,
the record produced before us shows all the three issues have been explained
by assessee before AO supported by documentary evidences. When similar
submissions were made by the assessee before the Ld. Pr. CIT, nothing
adverse have been pointed out in the impugned order as to how the A.O. has
not made enquiries at assessment stage on all these issues. PB-13 is cash flow
statement of assessee for assessment year under appeal in which all the above
items have been mentioned on which proposed notice under Section 263
have been issued. All these facts were before AO at the assessment stage
and all the details of sale and purchase of shares on which long term capital
gains exemption was claimed have been mentioned in the return of income
itself. Thus, there was no reason to believe that the AO did not examine this
issue at the assessment stage. Further, the case was selected for scrutiny
because the suspicious long term capital gains earned by assessee. This
information must be based on information received from Investigation Wing.
Therefore, Ld. DR was not justified in contending that report of Investigation
Wing have not been considered by the AO. Since it was the sole reason for
completing the scrutiny assessment, therefore, it could not be believed that
AO would not have gone through the material available before him on record.
May be the AO has not discussed the details in the assessment order but it
would not give right to the Ld. Pr. CIT to hold that no investigation or enquiry
have been made at assessment stage. It appears that AO has taken one of
permissible view in the matter as per Law and if the Ld. Pr. CIT does not
agree with the view of the AO, the assessment order could not be treated as
(2021) ABC 207
erroneous in so far as it is prejudicial to the interests of the Revenue.
Considering the totality of the facts and circumstances noted above in the
light of material on record, we are of the view that it is not a case of
inadequate or no enquiry, thus, Explanation-2 to Section 263 of the IT Act
would not be attracted in the matter. In this view of the matter, the assessment
order could not be held to be erroneous in so far as it is prejudicial to the
interests of the Revenue. We, accordingly, set aside the impugned order under
Section 263 of the IT Act and restore the assessment order.
7. In the result, appeal of Assessee allowed.
8. Order pronounced in the open Court.
___________
(2019) 7 ITJ Online 300 (Trib.-Chandirarh)
In the ITAT, Chandigarh
Shashi Bhushan Gupta
v.
Shri N.K. Saini, VP and Shri Sanjay Garg, JM
ITA No. 768/Chd/2018
21st August, 2019
Revisional Jurisdiction ratified/invoked by the Commissioner-In lieu of S.263
of the Income Tax Act,1961-Appeal Against the Order of the Commissioner-
set-aside the assessment order dated 28.10.2015 passed by the Assessing
Officer in as much as the order is neither erroneous nor prejudicial to the
interest of Revenue and as such the assumption of jurisdiction under section
263 of the Act is beyond his competence-Scrutiny Assessment by the
Assessing Officer u/s. 143(3) of Income Tax Act,1961-Ld. Pr.CIT set aside
the Assessment Order for the want of to the Assessing Officer to decide the
issue mentioned above afresh on merits in accordance with law after giving
adequate opportunity of being heard to the assessee and also make detailed
inquiry regarding the LTCG claimed u/s. 10(38) of the IT Act, 1961
amounting to Rs. 37,17,800 /- as exempt-Escaped Assessment with regards to
LTCG-Assesse in Appeal Agaisnt the order of the Commissioner U/s. 263 of
Income Tax Act,1961-Held-In the present case the AO conducted enquiry and
had taken a possible view and the Ld. Pr. CIT simply directed the AO to make
further enquiry in accordance with law but had not taken any step to make
enquiry herself and also did not point out that how and in what manner the
enquiries made by the AO were not sufficient. We therefore considering the
totality of the facts and keeping in view the ratio laid down by the Hon’ble
Delhi High Court in the aforesaid referred to cases, are of the view that the
Ld. CIT(A) was not justified in holding the assessment order dated
28.10.2015 passed by the AO as erroneous and prejudicial to the interest of
the Revenue, therefore the impugned order is set aside

ITR 329 : (2013) 212 Taxman 132 [Refer Para 6, 10]
Deniel Merchants Pvt. Ltd. v. ITO, GA No. 599 of 20196 with ITA No. 118
of 2016, Calcutta High Court, 2016 [Refer Para 7]
Director of Income Tax v. Jyoti Foundation, (2016) 2 ITJ Online 783
(Delhi) : (2013) 357 ITR 388 : (2013) 219 Taxman 105 [Refer Para 6, 10]
[Refer Para 7]
Pr. CIT v. Delhi Airport Metro Express Pvt. Ltd., (2017) 398 ITR 8 (Delhi)
[Refer Para 6, 9]
Surya Jyoti Software Pvt. Ltd. v. PCIT, ITA No. 2158/Del/2017 (ITAT Del)
[Refer Para 7]
Counsel :
– Tej Mohan Singh, for the Assessee;
– Dr. G.S. Phani Kishore, for the Revenue.
ORDER
Shri N.K. Saini, VP. :
1. This is an appeal by the Assessee against the order dt. 23.03.2018 of Pr.
CIT, Panchkula.
2. Following grounds have been raised in this appeal:
1. That the Ld. Commissioner of Income Tax has wrongly assumed
jurisdiction under section 263 of the Act to set-aside the assessment
order dated 28.10.2015 passed by the Assessing Officer in as much
as the order is neither erroneous nor prejudicial to the interest of
Revenue and as such the assumption of jurisdiction under section
263 of the Act is beyond his competence.
2. That the Ld. Commissioner of Income Tax has erred in failing to
consider the various replies and submissions placed on record in
proceedings before him which is arbitrary and unjustified.
3. That the assessment order having been passed by the Assessing
Officer after due application of mind and taking into consideration
the various replies, material on record and books of account, the
(2021) ABC 209
action resorted to by the Commissioner of Income Tax is
unwarranted and uncalled for.
4. That the order of Commissioner of Income tax is erroneous, arbitrary,
opposed to the facts of the case and is unsustainable in law.
3. From the above grounds it is gathered that the only grievance of the
assessee relates to the jurisdiction of the Ld. Pr. CIT under Section 263 of the
Income Tax Act, 1961 (hereinafter referred to as ‘Act’), in setting aside the
assessment order dt. 28.10.2015.
4. Facts of the case in brief are that the assessee filed his return of income on
29.10.2013 declaring an income of Rs. 7,96,730/- which was processed under
section 143(1) of the Act. Subsequently the case was selected for scrutiny
through CASS. The AO framed the assessment under Section 143(3) of the
Act at an income of Rs. 7,96,730/- and observed in para 2 of the assessment
order dt. 28.10.2015 as under:
“2. Detailed questioner along with notice u/s. 142(1) of the Income
Tax Act 1961 was issued by my predecessor on 19.05.2015 The
proceeding in the case was attended by Sh. Hardesh Kant Jindal & Sh
Akhilesh Jindal CA and submitted the requisite information /documents
as and when required and the case was discussed. The assessee is
Director in M/s Bhushan Oil and Fats Pvt Ltd, Ambala. During the
assessment proceeding the counsel of the assessee has submitted the
complete details of the investments made along with the sources and the
proof of the deduction claimed. Same were placed on record.”
4.1 Thereafter the Ld. Pr. CIT, Panchkula, exercised her jurisdiction
under section 263 of the Act and observed that the assessment record
revealed that the assessee had shown Long Term Capital Gain (LTCG)
of Rs. 37,17,800/- which was claimed as exempt under Section 10(38) of
the Act. According to her the AO had not questioned the assessee for
calling of the reasonability and justification for the aforesaid LTCG, as
such the non coverage of income of LTCG amounting to Rs. 37,17,800/-
which was claimed exempt made the assessment order dt. 28/10/2015 as
erroneous and prejudicial to the interest of the Revenue. Ld. Pr. asked the
assessee to explain as to why the above said assessment order passed by
the AO may not be cancelled / set aside under Section 263 of the Act for
making fresh assessment. She also mentioned that the Counsel of the
assessee attended the proceedings and filed written reply on the query
raised by her office. The Pr. CIT set aside the assessment order dt.
28.10.2015 by observing in para 4 of the impugned order as under:
4. Keeping in view the facts as stated above and the reply of the assessee
it is clearly established that the AO has not questioned regarding the
Long Term Capital Gain claimed by the assessee u/s. 10(38) as exempt
amounting to Rs. 37,17,800/- shown in the return of income and the
order passed by the AO in this case on 28.10.2015 is erroneous and
prejudicial to the interest of revenue. The impugned assessment order of
the AO passed on 28.10.2015 is thus erroneous and prejudicial to the
interest of revenue. The impugned assessment order of the AO passed on
28.10.2015 is cancelled/ set aside under Section 263 of the IT. Act, 1961
with the directions to the Assessing Officer to decide the issue mentioned
above afresh on merits in accordance with law after giving adequate
opportunity of being heard to the assessee and also make detailed inquiry
regarding the LTCG claimed u/s. 10(38) of the IT Act, 1961 amounting
to Rs. 37,17,800 /- as exempt.
5. Now the assessee is in appeal.
6. Ld. Counsel for the Assessee submitted that the Ld. Pr. CIT without
making any enquiry considered the assessment order passed by the AO as
erroneous and prejudicial to the interest of the Revenue. It was further
submitted that the assessee furnished all the details which were asked by the
AO who enquired in details and examined all the details furnished by the
assessee for making the investments, thereafter, on being satisfied, he has
taken a possible view, therefore the Ld. Pr. CIT was not justified in
considering the assessment order passed by the A.O. as erroneous and
prejudicial to the interest of the Revenue. It was pointed out that the assessee
replied to the AO in response to the various queries and informed that the
assessee was a Director in the Company M/s Bhushan Oil and Fats Pvt. Ltd.
and sold the shares of M/s S.E. Investments Ltd. worth Rs. 38,00,000/-, a
reference was made at page no. 12 of the assessee’s compilation. It was
submitted that the sale proceeds were accounted for and deposited in the bank
account maintained with HDFC Bank, Ambala City, reference was made to
page no. 14 of the assessee’s compilation which is the copy of the said bank
account. It was further submitted that the shares of M/s S.E. Investments Ltd.
were sold through contract note number BSE/2 dt. 11/01/2013 for a sum of
Rs. 38,13,100/- through M/s Modern Finance & Investments, Vadodara, a
reference was made to page no. 16 & 17 of the assessee’s paper book which is
the copy of contract note. He also referred to page no. 19 to 20 of the
assessee’s compilation which is the copy of statements of account received
from M/s Modern Finance & Investments wherein the details of the shares
sold on 11.01.2013 and the payments received on 19.01.2013 and 22.01.2013
had been mentioned. It was stated that the assessee purchased the shares on
14.09.2011 through the said broker M/s Modern Finance & Investments,
Vadodara, reference was made to page no. 21 of the assessee’s compilation
which is the copy of statement of account (sauda) issued by M/s Modern
Finance & Investments. It was accordingly submitted that the assessee
furnished all the details before the AO who examined those details and on
being satisfied, accepted the claim of the assessee after making proper
enquiries, therefore the Ld. Pr. CIT, was not justified in setting aside the well
reasoned assessment order dated 28.10.2015 passed by the AO.
The reliance was placed on the following case laws:
• Pr. CIT v. Delhi Airport Metro Express Pvt. Ltd., (2017) 398 ITR 8 (Delhi)
(2021) ABC 211
• ITO v. D.G. Housing Projects Ltd., (2016) 2 ITJ Online 776 (Delhi) :
(2012) 343 ITR 329 : (2013) 212 Taxman 132
• Director of Income Tax v. Jyoti Foundation, (2016) 2 ITJ Online 783
(Delhi) : (2013) 357 ITR 388 : (2013) 219 Taxman 105
The reliance was also placed on the decision dt. 09.04.2018 of ITAT Bench
‘A’ Chandigarh dated 09.04.2018 in ITA No. 771/Chd/2017 for the
Assessment Year 2012-13 , copy of the said order was furnished which is
placed on record.
7. In his rival submissions the Ld. CIT DR strongly supported the orders of
the authorities below and further submitted that the AO merely obtained the
documents from the assessee and placed those on record but no further
investigation / verification had been conducted by the AO therefore the
assessment order passed by him was erroneous and prejudicial to the interest
of the Revenue, as such the Ld. Pr. CIT was justified in setting aside the said
order by invoking the provisions of Section 263 of the Act. Reliance was
placed on the following case laws:
• Malabar Industrial Co. Ltd. v. CIT, (2018) 5 ITJ Online 298 (SC) : (2016)
28 ITJ 133 : (2000) 243 ITR 83 : (2000) 159 CTR 1 : (2000) 109 Taxman
66
• Surya Jyoti Software Pvt. Ltd. v. PCIT, ITA No. 2158/Del/2017 (ITAT Del)
• Deniel Merchants Pvt. Ltd. v. ITO, GA No. 599 of 20196 with ITA No. 118
of 2016, Calcutta High Court, 2016
8. We have considered the submissions of both the parties and carefully gone
through the material available on the record. In the present case the Ld. Pr.
CIT, set aside the assessment order passed by the AO by observing that no
proper enquiries were made by the AO for the shares of S.E. Investments sold
by the assessee. In the instant case, it is noticed that the AO vide letter dt.
19.05.2015 (copy of which is placed at page no. 10 & 11 of the assessee’s
paper book) specifically asked the assessee as under :
(iv). Please give detail of any movable/immovable asset(s)
purchased/sold by you during the Year 2012-13 relevant to Assessment
Year 2013-14. Please give complete detail of source of investment in
purchase of movable/immovable asset with documentary evidence with
mention of mode of payment. In case of sale of any movable/immovable
asset, you are required to furnish the detail of profit earned/loss incurred
out of the sale proceed.
8.1 In response to the above said letter, the assessee informed the AO that he
had sold shares worth Rs. 38,00,000/- of M/s S.E. Investments Ltd. vide his
letter, copy of which is placed at page no. 12 & 13 of the assessee’s paper
book. The Assessee also furnished the copy of the account of M/s Modern
Finance & Investments for the period from 01.04.2011 to 31.03.2012 which is
placed at page no. 21 of the assessee’s compilation which shows that the
assessee purchased 10,000 shares of M/s S.E. Investments Ltd. on 14.09.2011.
The Assessee also furnished the statement of account for the period from
01.04.2012 to 31.03.2012 received from the same broker i.e.; M/s Modern
Finance & Investments which is placed at page no. 19 & 20 of the assessee’s
paper book and reveals that the assessee received on 19.01.2013 a sum of Rs.
9,00,000/- each through Cheque No. 256246, 256247 & 256250 totalling to
Rs. 27,00,000/- and Rs. 6,00,000/- through Cheque No. 256249 through
RTGS. The remaining amount was received on 22.01.2013 through Cheque
no. 256258. The Assessee also furnished copy of the Contract Note which is
placed at page no. 16 of the assessee’s paper book which shows that 10,000
shares were sold by the assessee for a sum of Rs. 38,13,100/-. All the
aforesaid documents were furnished by the assessee before the A.O. in
response to his query relating to investments made along with sources and
proof of the deduction claimed. In the present case the assessee furnished all
the documents relating to the investments in S.E. Investments Ltd. and the
proof of sale of shares for claiming deduction under Section 10(38) of the
Act, so it cannot be said that the AO had not made the enquiries or the
assessee did not furnish the relevant documents in support of his claim for the
deduction claimed. In the instant case, the AO had taken one of the possible
view while framing the assessment under Section 143(3) of the Act.
Thereafter the Ld. Pr. CIT without making any enquiry herself, simply stated
that the AO should decide the issue a fresh on merits in accordance with law
after giving adequate opportunity of being heard to the assessee and also
make detailed enquiry relating to LTCG claimed under Section 10(38) of the
Act.
9. On a similar issue the Hon’ble Delhi High Court in the case of Pr. CIT v.
Delhi Airport Metro Express Pvt. Ltd., (supra) held as under:
“For the purposes of exercise of revisional jurisdiction under Section 263
of the Income Tax Act, 1961 by the Principal Commissioner the
conclusion that the order of the Assessing Officer is erroneous and
prejudicial to the interests of the Revenue has to be preceded by some
minimal inquiry. If the Principal Commissioner is of the view that the
Assessing Officer did not undertake any inquiry, it becomes incumbent
on him to conduct such inquiry.
It has further been held as under:
It was incumbent upon the Principal Commissioner to undertake an
inquiry as regards which of the assets were purchased and installed by
the assessee out of its own funds during the assessment year in question,
2011-12, and, which were those assets that were handed over to it by the
Corporation. The Principal Commissioner only referred to the circular
issued by the Board and concluded that the Assessing Officer was duty
bound to calculate and allow depreciation on the build-operate-transfer
arrangement in conformity with the circular, but the Assessing Officer
had failed to do so and that therefore, the order vas erroneous and
prejudicial to the Revenue. That did not constitute the reasons required to
(2021) ABC 213
be given by the Principal Commissioner to justify the exercise of
jurisdiction under Section 263. Only after undertaking an inquiry
himself, the Principal Commissioner could have remitted the matter,
under Section 263(1) to the Assessing Officer for afresh assessment. The
Tribunal was not in error in setting aside the revision order under Section
263 passed by the Principal Commissioner.”
10. A similar view has been taken by the Hon’ble Delhi High Court in the
case of ITO v. DG Housing Projects Ltd., (supra) wherein it has been held as
under:
“That the findings recorded by the Tribunal were correct as the
Commissioner had not given any reason for observing that the order
passed by the Assessing Officer was erroneous. The finding recorded by
the Commissioner was that “order passed by the Assessing Officer may
be erroneous”. The Commissioner had doubts about the valuation and
sale consideration received but he should have examined this aspect
himself and given a finding that the order passed by the Assessing
Officer was erroneous. He came to the conclusion and finding that the
Assessing Officer had examined this aspect and accepted the
computation figures but he had reservations. The Commissioner in the
order had recorded that the consideration receivable was examined by the
Assessing Officer but was not properly examined and, therefore, the
assessment order was “erroneous”. This finding would be correct, if he
had examined and verified the transaction himself and given a finding on
the merits. The Commissioner was patently wrong in stating that
Schedule III to the Wealth Tax Act, 1957, was not applicable but the
Assessing Officer should have adopted the formula/method. This
reasoning could not be accepted and did not show or establish that the
assessment order was erroneous.”
11. Similarly the Hon’ble Delhi High Court in the case of Director of Income
Tax v. Jyoti Foundation, (supra) held as under :
“Revisionary power under Section 263 of the Income Tax Act, 1961, is
conferred by the Act on the Commissioner/Director of Income Tax when
an order passed by the lower authority is erroneous and prejudicial to the
interest of the Revenue. Orders which are passed without inquiry or
investigation are treated as erroneous and prejudicial to the interests of
the Revenue, but orders which are passed after inquiry/investigation on
the question/issue are not perse or normally treated as erroneous and
prejudicial to the interests of the Revenue because the revisionary
authority feels and opines that further inquiry/investigation was required
or deeper or further scrutiny should be undertaken. In cases where there
is inadequate enquiry but not lack of enquiry, the Commissioner must
record a finding that the order / inquiry made is erroneous. This can
happen if an enquiry and verification is conducted by the Commissioner
and he is able to establish and show the error or mistake made by the
Assessing Officer, making the order unsustainable in law. An order of
remit cannot be passed by the Commissioner to ask the Assessing Officer
to decide whether the order was erroneous.
It has further been held that :
inquiries were certainly conducted by the Assessing Officer. It was not a
case of no inquiry. The order under Section 263 itself recorded that the
Director felt that the inquiries were not sufficient and further inquiries or
details should have been called for. The inquiry should have been
conducted by the Director himself to record the finding that the
assessment order was erroneous. He should not have set aside the order
and directed the Assessing Officer to conduct the inquiry.”
12. In the present case also the AO conducted enquiry and had taken a
possible view and the Ld. Pr. CIT simply directed the AO to make further
enquiry in accordance with law but had not taken any step to make enquiry
herself and also did not point out that how and in what manner the enquiries
made by the AO were not sufficient. We therefore considering the totality of
the facts and keeping in view the ratio laid down by the Hon’ble Delhi High
Court in the aforesaid referred to cases, are of the view that the Ld. CIT(A)
was not justified in holding the assessment order dated 28.10.2015 passed by
the AO as erroneous and prejudicial to the interest of the Revenue, therefore
the impugned order is set aside.
13. In the result, appeal of the Assessee is allowed.
14. Order pronounced in the open Court on 21.08.2019
___________
(2016) 2 ITJ Online 926 (Trib.-Mum)

Reliance Money Infrastructure Ltd.
v.
Pr. Commissioner of Income Tax, Mumbai
Shri Mahavir Singh, JM and Shri Rajesh Kumar, AM
ITA No. 3330 (Mum.) of 2016
23rd December, 2016
Revisional Jurisdiction invoked by the Commissioner Income Tax-S.263 of
Income Tax Act,1961-Scrutiny Assessment by Assessing Officer-that the
assessee is Ltd. Company engaged in the business of marketing and
distribution of insurance and mutual fund products, trading in bullion, real
estate broking services, derivatives trading in commodity market, providing
infrastructural facilities to its associate concerns etc. Original assessment for
the relevant A.Y. 2011-12 was completed by the AO u/s. 143(3) of the
Act vide his order dated 30.01.2014. Subsequently, the PCIT issued show
(2021) ABC 215
cause notice u/s 263 for revising of the assessment order passed u/s. 143(3) of
the Act vide show cause notice No. Pr. CIT-1/263/Show Cause Notice/2015-
16 dated 07.07.2015 for the reason that the AO failed to carry out relevant and
meaningful enquiries and the order passed by AO is prejuidiced to the
Revenue-Held- An order cannot be termed as erroneous unless it is not in
accordance with law and if the AO acting in accordance with law frames an
assessment, it cannot be branded as erroneous by the Commissioner simply
because in his opinion the order should have been written more elaborately.
Section 263 does not visualize a case of substitution of the judgment of the
Commissioner for that of the AO who passed the order unless the decision is
held to be erroneous. Where the AO has exercised the quasi-judicial power
vested in him in accordance with law and arrived at a conclusion such a
conclusion cannot be found to be erroneous simply because the Commissioner
does not feel satisfied with the conclusion. Section 263 is a section which
enables the Commissioner to have a look at the orders or proceedings of the
lower authorities and to effect a correction, if so needed, particularly if the
order or proceeding is erroneous and prejudicial to the interest of the
Revenue. The object of the provision is to raise revenue for the State and
Section 263 is an enabling provision conferring jurisdiction on the
Commissioner to revise the order of the authorities below in certain
circumstances particularly when it is erroneous and prejudicial. The provision
is intended to plug leakage to the revenue by erroneous order passed by the
lower authorities where the order of assessment by the AO is erroneous and
prejudicial to the interest of the Revenue. But in the present case before us the
AO has passed the assessment order after examining all the details, replies
and documents filed by the assessee. In view of our observations hereinabove
and judicial decisions of the various High Courts, we are of the considered
view that revisionary order u/s. 263 of the Act is wrong and accordingly
quashed.

Bharat Overseas Bank Ltd. v. CIT, (2012) 26 taxmann.com 330 (Chennai)
[Refer Para 3]
Bharti Hexacorn Ltd. v. CIT, (2013) 33 taxmann.com 210 (Trib.-Del) [Refer
Para 3]
CIT v Infosys Techn. Ltd., (2012) 17 Taxmann.com 203 (Kar) [Refer Para 3]
CIT v. Woodward Governors India (P.) Ltd., (2017) 3 ITJ Online 5 (SC) :
(2009) 13 ITJ 1 : (2011) 2 STD 303 : (2009) 312 ITR 254 : (2009) 223 CTR
1 : (2009) 179 Taxman 326 : (2009) 21 DTR 106 [Refer Para 13, 22]
CIT v. Gabriel India Ltd., (2016) 1 ITJ Online 948 (Bom) : (1993) 203 ITR
108 : (1993) 114 CTR 81 : (1993) 71 Taxman 585 [Refer Para 17, 26]
CIT v. Gera developments (P.) Ltd., (2016) 240 Taxman 467 (Bom) : (2016)
387 ITR 691 [Refer Para 17]
CIT v. Gillandes Arbuthnot & Co., (1973) 87 ITR 407 (SC) [Refer Para 14,
23]
CIT v. Harsh J. Punjabi, (2012) 345 ITR 451 (Del.) [Refer Para 3]
CIT v. Kohinoor Tobacco Products (P) Ltd., (2016) 2 ITJ Online 64 (MP) :
(2007) 7 ITJ 643 : (1998) 234 ITR 557 : (1998) 148 CTR 536 : (1998) 100
Taxman 190 [Refer Para 3]
CIT v. Mahavar Traders, (2016) 2 ITJ Online 72 (MP) : (1996) 220 ITR 167
: (2007) 7 ITJ 637 [Refer Para 3]
CIT v. Mangal Castings, (2008) 303 ITR 23 (P&H) [Refer Para 3]
CIT v. Max India Ltd., (2016) 2 ITJ Online 366 (SC) : (2008) 10 ITJ 8 :
(2014) 10 STD 43 : (2007) 295 ITR 282 : (2007) 213 CTR 266 : (2008) 166
CIT v. MEPCO Industries Ltd., (2007) 294 ITR 121 (Mad) [Refer Para 3]
CIT v. Reliance Communication Ltd., (2016) 240 taxman 655 (Bom) : (2017)
396 ITR 217 [Refer Para 17, 26]
CIT v. RKBK Fiscal Service (P) Ltd., (2013) 32 taxmann.com 153 (Cal)
[Refer Para 3]
Duggal & Co. v. CIT, (2016) 2 ITJ Online 777 (Delhi) : (1996) 220 ITR
M.I.Overseas Ltd. v. DIT, (2012) 28 Taxmann.com 279 (Uttarakhand) [Refer
Para 3]
[Refer Para 3]
Meerut Roller Flour Mills Ltd. v. CIT, (2013) 35 taxmann.com 14 [Refer
Para 3]
Sripan Land Dev (P.) Ltd. v. CIT, (2011) 11 taxmann.com 429 (Trib.-Mum)
[Refer Para 3]
Counsel :
– Arvind Sonde, AR and Jitendra Sanghui, AR for the Appellant;
– K.B. Shukla, CIT(A) DR for the Respondent.
ORDER
Shri Rajesh Kumar, AM :
(2021) ABC 217
1. This appeal by the assessee is arising out of the revision order of PCIT
passed u/s 263 of the Income Tax Act, 1961 (hereinafter ‘the Act’.), Mumbai
dated 28.03.2016. The Assessment was framed by ACIT Range-1(3), Mumbai
for the A.Y. 2011-12 vide order dated 30.01.2014 u/s. 143(3) of the Act.
2. The first jurisdictional issue raised by the assessee in this appeal is as
regards to the order of PCIT revising the assessment framed by Addl. CIT u/s.
143(3) of the Act as there is no specific issue before the PCIT as to how the
prejudice has caused to the Revenue in as much as it is erroneous. For this
assessee has raised following two grounds :–
“1. On the facts and circumstances of the case and in law, the learned
Principal Commissioner of Income Tax - 01, Mumbai (“the PCIT”) erred
in invoking the provisions of Section 263 of the Act and directing setting
aside of the assessment order passed under Section 143(3) of the Act by
the Additional Commissioner of Income Tax, Range -1(3), Mumbai (“the
Assessing Officer”) dated 30.01.2014 on the alleged ground that the said
assessment order was erroneous and prejudicial to the interest of the
revenue.
2. The learned PCIT erred in invoking the provisions of Section 263 of the
Act without specifying as to how the prejudice is caused to the Revenue
in as much as it is not pointed out as to where the order of the Assessing
Officer is erroneous in law and therefore how the interest of the Revenue
is affected adversely.
The Appellant prays that it be held that the action of the learned PCIT in
invoking provisions of Section 263 of the Act and directing the Assessing
Officer to pass a fresh assessment order be held to be ab-initio and/or
otherwise void and bad in law.”
3. Briefly stated facts are that the assessee is Ltd. Company engaged in the
business of marketing and distribution of insurance and mutual fund products,
trading in bullion, real estate broking services, derivatives trading in
commodity market, providing infrastructural facilities to its associate
concerns etc. Original assessment for the relevant A.Y. 2011-12 was
completed by the AO u/s. 143(3) of the Act vide his order dated 30.01.2014.
Subsequently, the PCIT issued show cause notice u/s 263 for revising of the
assessment order passed u/s. 143(3) of the Act vide show cause notice No. Pr.
CIT-1/263/Show Cause Notice/2015-16 dated 07.07.2015 for the reason that
the AO failed to carry out relevant and meaningful enquiries on the
followings :–
“It is observed that during F.Y. 2010-11, the Assessee Company
issued 200,000,000, 10% cumulative redeemable preference shares
of Rs.10/- each at a premium of Rs. 20/- to Reliance Money Mail
Ltd. These preference shares are redeemable at par after expiry of
15 years from date of allotment (i.e. 7th September, 2010).
However, the Assessing Officer failed to carry out any meaningful
enquiries into this aspect.
In Schedule – 16 “Significant Accounting Policies and Notes to
Accounts” forming part of the financial statements it is, stated by
the-, Company under the head ‘Going Concern Assumption.
As the accumulated losses of the company as at March 31st, 2011
exceed its paid up capital resulting in an erosion of its capital. The
accounts have been prepared on “Going Concern” basis on the
understanding that finance will continue to be available to the
Company for working capital requirements from its promoters.
It would be apparent from the above that prima facie, no prudent person
would make such huge investment in equity & preference shares in a
Company which has been making losses year after year and total losses
exceed paid up capital. As stated in the Note-13 by the Company, the
entire capital has been totally eroded. In this context, such huge
investment in loss making Company and that too after paying premium
of Rs. 20/- per share does not make commercial sense and this
investment ought to have been looked into closely. Prima-facie, “nature”
of transaction has not been examined.
It was seen that during F.Y. 2010-11, Reliance Money Mall Ltd. further
increased its investment in the Assessee Company by acquiring
additional Rs. 6,20,000/- equity shares for Rs. 62 lakhs. This investment
was in addition to 2,40,000 equity shares of the Company acquired in
F.Y. 2009-10. As a result of investment in F.Y. 2010-111 the Assessee
Company became subsidiary of Reliance Money Mall Ltd. w.e.f. July 8,
2010. Surprisingly, investment by Reliance Money Mall Ltd. in the
shares of the Assessee Company was by borrowing funds from its
associate companies. Why a huge loss making company was made a
subsidiary by Reliance Money Mall Ltd.? Careful analysis of facts ought
to have alerted the AO that something was unusual and investment by
Reliance Money Mall Ltd. in equity shares of assessee company to the
extent of acquiring stake as “holding company” did not make any
commercial sense. On top of it, the Reliance Money Mall Ltd. subscribed
to the preference shares of assessee company to the tune of Rs. 600
crores. This was highly intriguing. It is relevant to mention here that
Reliance Money Mall Ltd. itself had not got sufficient funds to invest in
preference shares of Assessee Company. It (Reliance Money Mall Ltd.)
obtained funds from Reliance Capital Ltd. in the form of preference
shares issued to Reliance Capital Ltd. at the premium of Rs. 999/- per
share. The Reliance Money Mall Ltd. also was running into losses and
had not started its business operations fully. The façade of preference
shares by Reliance Money Mall Ltd. at huge premium was adopted to
transfer funds from Reliance Capital Ltd. to Reliance Money
Infrastructure Ltd., through the conduit/medium of Reliance Money Mall
Ltd. No. enquiries whatsoever were carried out in this regard. The AO
failed to verify when the actual allotment of preference shares was made
(2021) ABC 219
and how the funds obtained through preference shares were utilised by
the Assessee Company.
It is relevant to mention here that demerged Infrastructure division of the
Assessee Company had 95.29% of total assets of the Assessee Company
which got transferred on merger with Reliance Capital Asset
Management Co. Ltd to the “amalgamated company”. It can be inferred
that Reliance Capital Ltd. was holding indirectly control over the
Assessee Company, being the fund provider to Emerging Money Mall
Ltd. (earlier known as Reliance Money Mall Ltd.), which had invested in
the Assessee Company. This would be apparent from the submissions
made before the Bombay High Court, in the Scheme of Arrangement for
merger of Reliance Capital Asset Management Co. Ltd. that both the
entities i.e. Reliance Capital Asset Management Co. Ltd. and demerged
company carved out from the Assessee Company by transferring
infrastructure division to the demerged company are part of the Reliance
Capital Group. Therefore, continuing investment in preference shares
indirectly by Reliance Capital Ltd. to the extent of Rs. 600 crores when
the investee company (Assessee Company) had less than 5% of the total
assets with it is not understandable. No prudent business person would,
believe that Assessee Company with had the capacity to pay huge
interest on redeemable preference shares and discharge its obligation to
redeem such preference shares when it was left with less than 5% of the
total assets it earlier had. It is well-nigh impossible.
It is also pertinent to point out here that on amalgamation of Emerging
Money Mall Ltd. with Reliance Capital Ltd., the assets of Emerging
Money Mall Ltd. which included investment of Rs. 600 crores in the
preference shares of Assessee Company by its holding company,
Reliance Money Mall Ltd. was assigned value of Rs. 2 crore only. In this
context, it appears that entire exercise of investing in preference shares
by Reliance Capital Ltd., firstly in the preference shares of Emerging
Money Mall Ltd. (at a premium of Rs. 999/- per share) and simultaneous
investment of the same amount i.e., Rs. 600 crores by Emerging Money
Mall Ltd. in the preference shares of Assessee Company (at a premium
of Rs. 20/- per share), was undertaken to book losses in the books of
Reliance Capital Ltd. pursuant to merger of the Merging Money Mall
Ltd. with Reliance Capital Ltd. The Assessing Officer failed to
appreciate this ploy of the Reliance Capital Ltd. Careful analysis of these
facts ought to have alerted the AO that something was unusual and
investment by Reliance Money Mall Ltd. in equity & preference shares
of assessee company did not make any commercial sense. It can be
inferred that actual nature of transaction has not been examined
(B) It is also stated in Schedule-16 giving details of “Significant
Accounting Policies and Notes to Accounts” under the captioned
‘Scheme of Arrangement’. Scheme of Arrangement:
Pursuant to the Scheme of Arrangement u/s. 391 to 394 of the
Companies Act, 1956 sanctioned by the Hon’ble High Court of
Judicature at Bombay vide its order dtd. 15th October, 2010 and,
filled with the Registrar of Companies (RoC), Maharashtra on 4th
February, 2011 and by the Hon’ble High Court of Gujarat at
Ahmedabad vide its order dtd. 13th January, 2011 and filed with the
RoC, Gujarat on 171h 2011, the Infrastructure Services division of
the Company has been demerged and transferred to Reliance Capital
Asset Management Ltd. (RCAM) with effect from the appointed
date ( Effective Date) i.e., 17th February, 2011.
Consequently, the following assets and liabilities have been
transferred to RCAM.
Assets and Liabilities Transferred Amount in Rs.
Fixed assets 45,381,530
Current assets 704,618,470
Liabilities (unsecured loan) 750,000,000
Consideration for arrangement
In respect of every 100 equity shares of Rs. 10 each fully paid
up held by shareholders in the company. Preference share of
Rs. 100/- each fully paid up have been issued by RCAM.
Preference shares of face value Rs. 10 lakh of RCAM have
been issued and allotted by RCAM to the preference
shareholders of the Company on a proportionate basis.
In view of demerger of infrastructure division of the company
pursuant to Scheme of Arrangement, the figures for the current
year are not comparable to those of the previous year.
It is observed that no enquiries have been carried out by the Assessing
Officer in respect of this demerger of infrastructure Services undertaking
of the Company and its merger with Reliance Capital Asset Management
Ltd. The ‘Scheme of Arrangement’ and copy of the order of the High
Court u/s. 391 to 394 of the Companies Act, 1956, giving approval to
this scheme, have also not been brought on record. There is nothing on
record to indicate whether there is a ‘separate undertaking’ for
Infrastructure Services as claimed by the assessee u/s. 2(19) of the
Income Tax Act (Infrastructure Services undertaking which was
demerged). What value has been assigned to the various assets of the
demerged undertaking of the company at the time of merger & whether it
was fair market value or not was not examined at all.
(C) It is observed that the assessee in the Return of Income claimed
capital loss from sale of shares by calculating the loss after adopting Sale
Consideration of Rs. 15,00,000/-. In the course of assessment
proceedings, the assessee brought to the notice of Assessing Officer that
(2021) ABC 221
actual sale consideration was Rs. 1,50,00,000/- and not Rs. 15,00,000/-
as stated in Return of Income. The Assessing Officer allowed the higher
amount of capital loss even though no revised return was filed as desired
by the Apex Court in Goetze India Ltd. There was no time available with
the assessee to file revised return u/s. 139(5) of the IT Act and yet higher
amount of capital loss of Rs. 2,75,76,240/- was allowed by the A.O. in
the course of assessment. It amounts to going against the spirit provisions
of Section 139(5) of the Act as such act would nullify the time limit
within which revision can be made. Further, this action of the A.O. is
against the ratio of the decision of Goetze India Ltd. It is admitted that
some judicial pronouncements have carved out a small window for
allowing claims of the assessee not made in the return filed. However,
this power is available (As per the judicial pronouncement) only with the
appellate authorities and AO still has no power to allow claim of the
assessee made during the assessment proceedings which has not been
made in the Return of Income filed and /or in the revised return.
(D) The assessee has claimed deduction for refund of referral fee of Rs.
9,60,44,600/- pursuant to Note received from Insurance Regulatory
Development Authority. No details have been called for by the A.O. in
respect of this Note. No enquiry as to why the payment has been made to
the Assessee Company for alleged referral fee? Whether any services
were rendered by the Assessee Company and if yes,, the nature thereof
was not examined by the AO The AO also failed to examine whether it
was only an attempt to reduce the profit of ‘Associate Company’ which
has paid alleged referral fee.
(E) The assessee has claimed the deduction for expense under the
head ‘Forward Brokerage Trade Settlement’ to the tune of Rs.
62,509,311/-. No details have been gathered by the AO whether this
expense was related to the business of the assessee and whether there
was any need of entering into forward contracts, whether any amount
was paid for indulging in speculative transaction or genuine hedging
activity. Further, it was noticed that there were “gold futures contract”
outstanding to the extent of Rs. 28,03,42,656/- for 99.5 kg. of gold. Any
mark-to-market losses on such contracts are merely notional losses and
these are not allowable expenditures. Same is true about foreign currency
forward contracts.
Where these losses have been hidden has not been examined. It is not
possible to believe that there was neither any income nor losses from
such outstanding contracts. As per Instruction no 3 of 2010 dt.
23.03.2010, the AO was to closely examine such hidden losses arising
from forex derivatives or from open, unsettled & outstanding positions of
goods & forex. The AO failed to carry out relevant and meaningful
enquiries in this regard.
(F) The assessee has claimed Long Term Capital Loss of Rs.
41,076,270/- arising from sale of shares of unlisted companies. It is
observed that shares have been sold to Reliance Capital Ltd. which is the
main Company controlling, the holding Company of the Assessee
Company (Reliance Money Mall Ltd.) directly or indirectly. The AO has
not examined whether the price has been charged at Arm’s Length Price
or the losses has been claimed by the Assessee Company in order to
boost profits of Reliance Capital Ltd. It defies logic that someone would
sell investment at huge loss to its “associate company” when there is no
immediate requirement of funds. This issue has escaped attention of the
AO.
(G) The assessee has shown deposit of Rs. 12,683,858/- has margin
money with broker. Who is the broker, whether this huge amount was
required or not, has not been considered at all by the AO What activity
has been undertaken through this broker was not examined by the AO.
(H) The assessee has taken the premises by way of lease and has claimed
expenses of lease rent and huge expenditure has been claimed in respect
of “improvement? on the leasehold property. There is substantial sale out
of these improvements but no details had been examined by the AO
despite the fact that the information has been made available to the AO
in the course of assessment proceedings. Only cryptic statement was
made before the AO that “sale of leasehold improvements” and, at
various stations. What were the assets sold to whom these were sold have
not been examined. Sale of leasehold improvements for Rs. 27,172,549/-
has been accepted without carrying out any meaningfully enquiries.
There is one more issue related to leased premises and that is “payment of
property taxes” to the extent of Rs. 56,41,858/- Whether it was liability
of lessee or not ought to have been examined after seeing the lease
contract & whether there was reimbursement from the lessor was also
not examined by the AO.
3. It is settled proposition of Law that failure of the AO to carry out
relevant and meaningful enquiries as warranted by the facts and
circumstances of the case renders the assessment order erroneous and
prejudicial to the interest of the revenue. This also emerges from the ratio
of the decisions such as Malabar Industrial Co. Ltd. v. CIT, (2018) 5 ITJ
Online 298 (SC) : (2016) 28 ITJ 133 : (2000) 243 ITR 83 : (2000) 159
CTR 1 : (2000) 109 Taxman 66, CIT v. Max India Ltd., (2016) 2 ITJ
Online 366 (SC) : (2008) 10 ITJ 8 : (2014) 10 STD 43 : (2007) 295 ITR
282 : (2007) 213 CTR 266 : (2008) 166 Taxman 188, CIT v. Mangal
Castings, (2008) 303 ITR 23 (P&H), CIT v. Kohinoor Tobacco Products
(P) Ltd., (2016) 2 ITJ Online 64 (MP) : (2007) 7 ITJ 643 : (1998)
234 ITR 557 : (1998) 148 CTR 536 : (1998) 100 Taxman
190, CIT v. Mahavar Traders, (2016) 2 ITJ Online 72 (MP) : (1996)
220 ITR 167 : (2007) 7 ITJ 637, Duggal & Co. v. CIT, (2016) 2 ITJ
(2021) ABC 223
Online 777 (Delhi) : (1996) 220 ITR 456 : (1994) 122 CTR 171 : (1994)
77 Taxman 331, CIT v. MEPCO Industries Ltd., (2007) 294 ITR 121
(Mad), Meerut Roller Flour Mills Ltd. v. CIT, (2013) 35 taxmann.com
14, Bharti Hexacorn Ltd. v. CIT, (2013) 33 taxmann.com 210 (Trib.-Del)
CIT v. RKBK Fiscal Service (P) Ltd., (2013) 32 taxmann.com 153
(Cal), M.I.Overseas Ltd. v. DIT (Int.Tax), (2012) 28 Taxmann.com 279
(Uttarakhand), Bharat Overseas Bank Ltd. v. CIT, (2012) 26
taxmann.com 330 (Chennai), CIT v. Harsh J. Punjabi, (2012) 345 ITR
451 (Del.), CIT v. Infosys Techn. Ltd., (2012) 17 Taxmann.com 203
(Kar) and Sripan Land Dev (P.) Ltd. v. CIT, (2011) 11 taxmann.com 429
(Trib.-Mum).
4. 1, therefore, hold that assessment order passed by the AO u/s. 143(3)
of the Act on 30.01.2014 is erroneous and prejudicial to the interest of
the revenue on account-of-failure of the AO to carry out relevant and
meaningful inquiries as warranted by the facts and circumstances of the
case, especially in respect of areas mentioned above. I, therefore, intend
to set-aside the assessment order passed by the AO on 30.01.2014. If you
have any objection to this proposed action, you are requested to send
your objections within three weeks of receipt of this letter, failing which
undersigned would be free to take appropriate action as per provisions of
the Law. If you intend to avail a personal hearing, then you may attend
this office on 29th July, 2015 at 11.30 A.M.”
4. The PCIT in view of the above show-cause notice passed revision order
u/s. 263 of the Act dated 28.03.2016 on the following issues.
(i) Non-examination of the issue of preference shares to Reliance Money
Mall Ltd. (RMML) in respect of the issue of 20 crores preference shares
of face value of 10 each on a premium of Rs. 20 totalling to Rs. 600
crores.
(ii) Non-examination of claim of deduction towards return of referral fee.
(iii) Non-examination of claim of deduction towards loss of incurred on
forward broking trade settlement of gold business.
(iv) Non-examination of claim of allowance of long-term capital loss on sale
of shares amounting to Rs. 2,75,76,240/-.
(v) Non-examination of allowance of claiming of depreciation on cost of
improvement of leasehold premises u/s. 32(i) of the Act.
(vi) Lease rent and improvement expenditure.
On the above issues the PCIT has only recorded the fact that the AO while
completing the assessment u/s. 143(3) of the Act failed to carry out the
relevant and meaningful enquiries. Now, we will discuss the facts and
evidences produced before the AO during the assessment proceedings by the
assessee on the questionnaires and replies given. The brief facts relating to the
first issue are that the PCIT while deciding the issue on revision u/s. 263 of
the Act noted that the assessee was asked to explain the source of credit
introduced in the books of accounts by way of issue of 20 lakh preferential
shares, each having face value of Rs. 10 at the premium of Rs. 20 each to its
holding company RMML Ltd. According to PCIT no proper enquiry to verify
the source of funds / credits introduced as well as genuineness of the
transaction was verified while passing of the assessment order u/s. 143(3) of
the Act by the AO. The PCIT was of the view that no details regarding source,
capacity and genuineness of such credits or share capital introduced was
enquired by the AO. The PCIT was of the view that due to demerger of the
infrastructure and real-estate broking business of the assessee company i.e.
Reliance Money Infrastructure Ltd (RMML) resulted into the erosion of the
value of investment of Rs. 600 crores into Rs. 2 crores only. According to
PCIT the entire aspects of sale and demerger of its infrastructural division as a
going concern whether resulted into any capital gain due to such slump sale or
was not enquired into by the AO u/s. 50B r.w.s. 2(42C) of the act or u/s
2(19AA) of the Act. The PCIT further noticed that RMML is holding
company of the assessee was subsequently amalgamated with Reliance
Capital Ltd. (RCL) and therefore RCL has become the virtual holding of the
company of the assessee as well. PCIT also noted that even no details
regarding permission of authorization of RCL or its issue of preferential
shares filed by the assessee but PCIT admitted the factum that the details of
party RMML to whom Rs. 200 crores new preferential shares were issued and
the details of Reliance Capital Ltd. and Reliance Securities Ltd. to whom the
preferential shares are redeemed of Rs. 200 crores is found placed on
record vide annexure 15 to the assessee’s letter dated 17.01.2014. But he was
of the view that this aspect has not at all been enquired by the AO. Another
aspect of the issue was that AO failed to conduct necessary enquiries as to
ascertain the source of funds introduced in its books of account by way of
issue of preference shares on huge premium through circuitous route for
favouring group company as well as to ascertain the genuineness of the
erosion of the value of such investment and also to ascertain tax implication
on demerger of the holding company. The PCIT also noted that 95.29% loss is
transferred to the demerge company and therefore is withdrawn the provision
of Section 2(19AA) of the Act is without any basis and accordingly the entire
loss is still in the hands of the assessee company amounting to Rs.
606,78,45,352/- crore. In view of these facts the PCIT holding the assessment
order as not only erroneous but also prejudicial to the interest of the Revenue.
5. Now, we have to examine detail and evidences produced by the assessee
before AO during the course of the assessment proceedings. First of all, the
learned Counsel for the assessee Shri Arvind Sonde referred to the notice
issued by the AO u/s 142(1) of the Act vide No. DCIT 1(3)/Notice/13-14
dated 30.05.2013 and referred to question No. 25 which reads as under :–
“25. Whether the company has issued any fresh share during the year or
raised any amount by way of debenture/FD etc. If so, how the issue
expenses have been dealt with in the accounts.”
(2021) ABC 225
This detail was submitted by the assessee vide reply dated 17.01.2014
wherein complete detail of parties to whom new preferential shares were issue
and preferential shares are redeemed and enclosed as Annexures-15 & 16.
The relevant Annexure are enclosed at assessee’s paper book page 47 and the
relevant reads as under :–
“Annexure-15
Sr. Name of PAN Address Amount
No. Party
1. Emerging AAECR3099M 570, Rectifier 2,000,000,000/
Money Mall House, Naigum -
Ltd. Cross Road,
Next to Royal
Industrial Estate,
Wadala, Mumbai
-31
Annexure-16
Sr. Name of PAN Address Amount
No Party
.
1. Reliance AAACR5054J ‘H’ Block, 1st 1,000,000,000
Capital Floor, Dhirubhai
Ambani
Knowledge
2. Reliance AADCR0260P 11th Floor, Rtech 1,000,000,000
Securities IT Park, Western
Ltd. Express
Highway,
Goregaon (E),
Mumbai-63
It was contended by the learned Counsel that during the course of assessment
proceedings the AO issued notice u/s. 142(1) of the Act and in the said
notice vide question No. 25, the AO has asked the assessee as to whether the
company has issued any fresh shares during the year. The assessee submitted
the details regarding the issue of shares and redemption of shares before the
AO vide letter dated 17.01.2014. Further, a query was raised by the AO and
assessee submitted the explanation regarding the issue of preference shares at
premium of Rs. 20 per share vide letter dated 27.01.2014. The relevant reply
at item No. 7 dated 27.01.2014 reads as under :–
“7. As regards your query regarding basis of charging of share premium
on allotment of 20 crore 10% Cumulative Redeemable Preference Shares
(CRPS) of Rs. 10/- each, at a premium of Rs. 20/- per share our client
submits that there shares are to be redeemed also at a premium of Rs.
20/- paer share. The share premium of Rs. 20 received on allotment will
be repaid on redemption and it is not the case that the share premium
received will vest with the company. This can be verified from the copy
of Board Resolution passed on 07.09.2010 along with extract from
minutes of the meeting of Board of Directors enclosed as Annexure 7,
which clarify the terms of issue of preference shares.”
6. In view of these details, the learned Counsel for the assessee stated that
even entire details in regard to preferential share was given in the directors
Report and the issue of demerger which reads as under :–
“Share Capital
Preference Shares
During the year under review, the company made a fresh issue of 20
crores 10% Cumulative Reedeemable Preference Shares of Rs. 10/- each
fully paid up at a premium of Rs. 20 per share aggregating to Rs. 600
crore. Out of the proceeds of this issue, the company has redeemed 20
crores (twenty Crores) 10% Cumulative Redeemable Preference shares
of Rs. 10/- each fully paid up.
Demerger
Pursuant to the Scheme of Arrangement under Section 391 to 394 of the
Companies Act, 1956 Sanctioned by the Hon’ble High court of
Judicature at Bombay and by the Hon’ble High Court of Gujarat at
Ahmedabad, the Infrastructure Services Division of the Company has
been demerged and transferred to Reliance Capital Asset Management
Ltd. w.e.f. the Appointed date (Effective date0 in terms of the
Scheme i.e. 17th February 2011.”
In view of the above of these facts, the learned Counsel for the assessee
further argued that the AO has examined everything and even the nature of
transaction in regard to the issue of share and it is also a fact that this
investment was made on the basis of erosion of loss of the company as on
31.03.2011, wherein, paid up capital resulting in an erosion of its capital and
amounts have been paid on a going concern basis on the understanding that
finance will be available with the company for work-in-capital requirement
from its promoters. In view of the above, the observation of PCIT that huge
investment is made in loss making company by paying a premium of Rs. 20
per share does not make commercial sense and investment ought to have
looked into closely by the assessee. The learned Counsel for the assessee
argued that the promoter has brought in the funds by way of preference shares
as their holding was 62%. From the terms of preference shares issued it can be
seen that the same was redeemable at premium of Rs. 20 per share and the
premium was required to be refunded by the company on its redemption.
Hence, funds were brought in by the promoters and on the terms which cannot
be said to be prejudicial to the interest of the Revenue. In view of the above,
huge investment in quantity and that also preferential share was a commercial
decision by a businessman and the Revenue has no authority to question the
(2021) ABC 227
same. Another observation of the PCIT that the investment by RMML in the
shares of assessee’s company by borrowing funds from its associate
companies that’s why a huge loss making company was made as subsidiary
by RMML. The learned Counsel for the assessee argued that the observation
that RMML has brought funds from its associate company is not at all correct
as RMML had issued preferential shares and utilized the same proceeds to
make investment in the capital. The learned Counsel for the assessee
contradicted this fact wherein, it is stated that the RMML obtain the funds
from RCL in the form of preferential shares. It was argued that RMML
acquiring stake in a holding company does or does not make any commercial
sense, it is a businessman decision and same cannot be questioned now by
PCIT or Revenue. It was argued that RMML is a promoter of the company
and they have infused funds into the company from their survival or revival
and it is a common knowledge that the promoters have to invest huge funds
for managing the affairs of the company and more particularly when the
investee company is making loss. It was explained that this business was
growing and therefore funds were required and turnover in subsequent years
went up to Rs. 785 crores in 2012 and Rs. 1356 crores in 2013. The learned
Counsel for the assessee referred to the allegation of Revenue when the
preferential share of RMML at huge premium was adopted to transfer the
funds from RCL to RMML and then to the assessee has no tax implication. To
explained this, the learned Counsel for the assessee referred to the fact that the
assessee had issued preferential shares to RMML, the source of which were
explained and also it is confirmed by PCIT while adjudicating the issue. The
learned Counsel for the assessee argued that there is no facade or there is no
conduit as alleged by the Revenue. The learned Counsel for the assessee
stated that this is only conjunctures and surmises of the PCIT. He explained
that the AO is required to look into the source of funds by way of share
capital, which has been confirmed by the PCIT that the funds are fully
explained. To confirm this the assessee explained vide letter dated
27.01.2014, whereby copy of board resolution allotting of shares of RMML
was submitted which shows that the shares were allotted on 07.09.2010 and
this fact was filed during the course of assessment proceedings. The assessee
before the AO filed complete bank statements including the details of
utilization of funds received on issued of preference shares. He referred to the
utilization as under :–
Name Amount in Crs Purpose
Reliance Securities Ltd. 100 Redemption of preference shares
Reliance capital Ltd. 100 Redemption of preference shares
Reliance Capital Ltd. 285 Repayment of loan
Reliance Securities Ltd. 112.38 Repayment of loan

Name Amount in Crs Purpose
- 2.62 Internal purposes
Total 600
7. Another allegation of the Revenue that the RCL was holding the control
indirectly over the assessee being the fund provider to RMML, which has
been invested by the assessee. The fund position was explained by the leaned
counsel for the assessee by filing the details which are as under :–
Sr. No. Name of the Company As on As on
31.03.2010 31.03.2011
1. Reliance Securities Ltd. 19% 19%
2. Reliance Composite 19% -
Insurance Broking Ltd.
3. Reliance Spot exchange 19% -
Infrastructure Ltd.
4. Reliance CWT India Ltd. 19%
5. Emerging Money Mall 24% 62%
Ltd.
Equity Shareholders of EMML as on 31-03-2010 and 31-03-2011 were as
under: -
Sr. No. Name of the Company As on As on
31.03.2010 31.03.2011
1. Reliance CWT India Ltd. 40%
2. Reliance Spot exchange 41%
Infrastructure Ltd.
3. Reliance Money Express 19%
Ltd.
4. Ashadeep Properties Pvt. 50%
Ltd.
5. Chlorosulf Pvt Ltd. 50%
8. The learned Counsel for the assessee explained from the above list of
shareholders that the reliance capital was never holding the shares indirectly
or directly and hence the observation of the PCIT is without any basis and
factually incorrect. He explained that investment in preferential shares RCL in
RMML and by RMML in the assessee’s company does not given control
direct or indirect but the control arise only out of quantity holding it has made
investment only in RMML. The learned Counsel explained that many
companies may be part of group but that does not mean there is a direct or
indirect control, which arises only on account of the quantity holding. The
learned Counsel for the assessee stated that each and every company is
(2021) ABC 229
independent and their existence cannot be questioned. The learned Counsel
for the assessee also explained that the balance sheet of RMML clearly shows
that there is loss and erosion of wealth and the investment made have to be
continued only for the reason that they are repaid in terms of the provision of
its allotment. He explained that the findings of PCIT is wrong that RCL has
indirectly invested in the preference shares of the company, actually RCL has
invested in the preferential shares of RMML and the same cannot be
constituted as indirect investment in the preference shares of the company. It
was stated that the preference shares subscribed during the year, whereby
majority shareholders being RMML, who was holding 62% equity shares
being largest shareholder and they have infused the fund into the company by
way of preferential shares, which gives them leeway to get the money back
after the company starts performing well. As regards to the issue of
amalgamation of RMML with RCL which took place on 31.03.2013, which is
two years beyond the end of the preceding year for which the assessment was
carried out by the AO but the subsequent funds i.e. as far as 2 years beyond
cannot be looked upon by the Revenue authorities. It was clarified that the
assessee issued shares to RMML on 07.09.2010 and RMML issued preference
shares to RCL on 12.10.2010 and both the funds went during F.Y. 2010-11
relevant to this A.Y. 2011-12. However, amalgamation of RMML took place
on 31.03.2013 from the date given above and hence observation of the PCIT
that exercise of investment was made with a view to book loss in the RCL
is prima facie incorrect as the event of amalgamation between RMML and
RCL took place almost after 33 months from the issue of shares by the
assessee as well as RMML. In such circumstances, the learned Counsel for
the assessee submitted the details that the value of the preferential share have
eroded due to huge loss incurred by the assessee and he furnished unaudited
divisional balance sheet of the assessee company as on the date of merger i.e.
15.02.2011, which has been reproduced in the order of PCIT and we need not
to reproduce the same again for the sake of brevity.
9. As regards to the another issue, the demerger of infrastructure division in
to Reliance Capital Assessment Management Company Ltd. (RCAMCL). It
was explained by the learned Counsel for the assessee that the fact regarding
demerger of infrastructure division of the assessee company was explained by
filing a separate note in the notes on accounts which was submitted along with
return of income and also during the course of the assessment proceedings
same was explained. The relevant scheme of demerger has been approved by
the Hon’ble Bombay High Court and Hon’ble Gujarat High Court reads as
under :–
“14. Scheme of Arrangement:
Pursuant to the scheme of arrangement (“the Scheme”) under Sections 391
to 394 of the Companies Act, 1956 sanctioned by the Hon’ble High
Court of Judicature at Bombay vide its Order dated 15th October, 2010
and filed with the Registrar of the Companies (RoC), Maharashtra on 4th
February, 2011 and by the Hon’ble High Court of Gujarat at
Ahmedabad vide its order dated 13th January, 2011 and filed with the
RoC, Gujarat on 17th February, 2011 the infrastructure services division
of the company has been damaged and transferred to Reliance Capital
Asset Management Ltd. (“RCAM”) with effect from the Appointed Date
(Effective Date) i.e. 17th February, 2011
Consequently the following assets and liabilities have been transferred to
RCAM:.
Assets and Liabilities Transferred Amount in Rs.
Fixed Assets 45,381,530
Current assets 704,618,470
Liabilities (unsecured loan) 750,000,000
Consideration for arrangement
In respect of every 100 equity shares of Rs. 10 each fully paid up held
by shareholders in the company, I preference share of Rs. 100 each
fully shareholders in the Company, I Preference shares of Rs. 100
each fully paid up have been issued by RCAM.
Preference shares of face value Rs. 10 lakhs of RCAM have been
issued and allotted by RCAM to the preference shareholders of the
Company on a proportionate basis.
In view of demerger of Infrastructure division of the company
pursuant to Scheme of Arrangement, the figures for the current year
are not comparable to those of the previous year. “
It was explained by the learned Counsel Shri Arvind Sondhe that the scheme
of an arrangement of demerger approved by Hon’ble High Court of Bombay
and Hon’ble High Court of Gujarat, looked into all the aspects before
approving the schemes of demerger and now the PCIT cannot raise any
question on the judgement of Hon’ble High Courts. It was explained that the
scheme and orders of Hon’ble High Courts are in public domain and the same
are also filed with the Registrar of companies (ROC). It was explained that
the same was filed along with the return of income and this was very well
noticed by the AO while framing assessment and even that authorities below
cannot take any adverse view on the issue of scheme of arrangement i.e.
demerger of infrastructure undertaking from the assessee company because
Hon’ble High Courts have approved the same. The learned Counsel for the
assessee argued that as an effect of demerger scheme the loss of the company
which were brought forward will be carry forward by the assessee company
and thus available loss of the assessee’s company to have been reduced for
carry forward purpose and this cannot be considered as prejudicial to the
interest of the Revenue or even no error has caused to the Revenue. Hon’ble
High Courts have approved this scheme.
(2021) ABC 231
10. The next issue on which revision order is passed is as regards to the claim
of deduction on refund of referral fee allowed by the AO while framing
assessment u/s. 143(3) of the Act without proper enquiry and without
application of mind. The PCIT was of the view that the claim of assessee in
this regard that assessee being a Reliance ADA Group Company, provided
infrastructure and other support services to various Reliance ADA Group
Companies including Reliance Composite Insurance Progress Ltd. decided to
utilize the services of the assessee company for optimization and furtherance
of its business. RCBIL entered into an arrangement that the assessee company
will provide the infrastructure support services and data base of the assessee
company and for providing such services the assessee company charged a
sum of Rs. 8,91,50,000/- in A.Y. 2008-09 and Rs. 5,48,99,600/- in A.Y. 2009-
10. Now, the claim of the assessee that it offered its total income in the
respective assessment years but it is claimed that RCIBL is a registered
Insurance broker with IRDA and the IRDA inspected the books of account of
RCIBL as per the regulatory powers granted to IRDA. When IRDA raised
objection for the payment made by RCBIL to assessee company, the assessee
refunded the referral fee charges received from its associate concern and
raised a debit note qua the amount of Rs. 6,51,54,000/- for the A.Y. 2008-09
and Rs. 3,08,94,600/- for the A.Y. 2009-10. The PCIT was of the view that
the income earned by assessee in earlier years is due to various type of
infrastructural services provided by the assessee company as per agreement
entered into with its associate concerns, which decision was mutually taken to
the best of commercial interest of the assessee as well as its associate concern
RCIBL therefore, according to the PCIT, the claim of deduction in this year is
going to reduce the income already earned and this claim cannot be made on
the objection of IRDA which is a regulatory authority for Insurance business.
According to the PCIT, this income has already been accrued for and hence,
the AO has not enquired into this aspect of deduction. Hence, he hold the
assessment order as erroneous as well as prejudicial to the interest of the
Revenue and passed revision order u/s. 263 of the Act. On this aspect, the
learned Counsel for the assessee detail out the evidences provided before AO
during the course of assessment proceedings, wherein, assessee vide letter
dated 27.01.2014, explained the issue of claim of deduction on referral fee
that was refunded to its associate concern amounting to Rs. 9,60,44,600/-
pursuant to note from IRDA. The assessee submitted the following
explanation before the AO vide letter dated 27.01.2014 which reads as
under :–
“Reliance Money Infrastructure Ltd. (RML) is a Reliance ADA Group
company which provides infrastructure and other support services to the
Reliance ADA group companies. Reliance Composite Insurance Brokers
Ltd (RCIBL) being part of Reliance ADA Group decided to utilize the
services of RML for optimization for the cost and furtherance of its
business. RCIBL entered into an arrangement with RMIL to avail the
infrastructure support services and data base of RMIL. The leads
generated were offered to select insurers depending on the requirement
of the clients and the suitability for the offerings of the respective
insurers to conclude the deals.
On instructions of Insurance Regulatory Development Authority, referral
charges received by RMIL Rs. 9,60,44,600/- were refunded to RCIBL on
2nd July, 2010. RCIBL for recovering referral charges paid to RMIL
raised debit note of Rs. 6,51,50,000/- for F.Y. 2008-09 and Rs.
3,08,94,600/-
11. It was explained that on the instructions of IRDA who is the controlling
authority for Insurance business, and this amount was refunded and during the
year under consideration no referral fee has been received, which is part of
this refunded amount. Thus there is no rendering of service during the year
and services were rendered in the earlier years. Therefore, the learned Counsel
for the assessee argued that if any enquiry is to be made qua this income or
assessment of the income in the hands of the assessee that can only be made
in A.Y. 2008-09 and 2009-10 and not in the relevant A.Y. 2011-12. The
learned Counsel for the assessee also explained that the transaction of debit of
referral charges during the year in the profit and loss account is nothing but
writing off of income which was previously received and offered to tax.
According to him, the AO has examined this issue by making a query and the
same was replied by the assessee and this aspect has also been considered
while framing assessment of RCIBL, wherein, the same AO has framed
assessment only on 30.01.2014, which is also the same date when the
assessment in the present case was framed. It was explained by the learned
Counsel for the assessee that when the AO is the same and assessments were
framed on the very same date, he has examined every aspect of this deduction
of refund of referral charges. It is not in doubt that assessee has not refunded
the amounts and which is very much available on record. Even now, the
learned Counsel for the argued that the PCIT while passing revision order u/s
263 of the Act has not doubt the genuineness of transaction, only aspect
examined by PCIT is that no enquiry was made by the AO, qua that the
learned Counsel stated that complete enquiry by the AO was made while
raising a query and the same was answered by the assessee during the course
of assessment proceedings. He stated that the AO has formed his opinion and
this is one of the possible views.
12. In respect to another ground of claim of deduction towards loss incurred
on forward brokering trade settlement. The assessee explained that the
company is into distribution of gold coins to retail customers and to cover the
risk of price fluctuation of gold, it hedged the gold position with MCX
exchange on mark to market position and is accounted under the head
Forward brokering Trade settlement. For this issue of hedging, it was
explained that there is a considerable gap between the date of purchase and
the date of sale and the company needs to hedged the same against the price
movement of gold and company used gold futures at MCX to achieve this
(2021) ABC 233
purpose. Assessee filed the details before the AO vide letter dated 17.01.2014
during the proceedings and the details are enclosed at page 49 of assessee
paper book which reads as under :–
Scrip Purc Purchase Index Indexed Sale Sale Profit /
hase Amount ed Cost Date Proceeds (Loss)
date Facto
r
Reliance 25.02 245,000 582 299.304 23.07. 245,000 (54,304)

Spot .09 10
Exchange
India Ltd.
Bombay 24.03 15,000,0 582 18,324,7 24.06. 15,000,0 (3,24,742

Stock .09 00 42 10 00 )
exchange
Ltd.
National 20.12 108,333, 582 132,345, 20.09. 108,333, (24,012,0

Multi .08 365 387 10 355 32)
Commodi
ty
Exchange
Reliance 23.03 161,783 582 197,642 24.02. 12,480 (185,162)

Money .09 11
Hong
Kong Ltd.
In view of the above fact is it clear that the transaction statement enclosed in
assessee’s paper book to support his case was field before the AO during the
course of assessment proceedings. The assessee explained before the AO that
the company is in distribution of gold coins to retail customers and to cover
the risk of price fluctuation of gold price, it hedged the gold position with
exchange on mark to market position, which is accounted for under the head
of forward brokering trade settlement. After going through these details, the
AO framed the assessment. But PCIT was of the view that no enquiry or
investigation was made by the AO in this regard while allowing entire loss
and the relevant of PCIT in para 11 reads as under :–
“11. ….Major sales and purchases are made to/from various private
parties including to/from its associate concerns / companies. The
assessment records contain the party-wise purchase and sale of gold
conins exceeding Rs. 10 lakhs filled by the assessee vide Annexure-1 to
its letter dated 25-01-2013. The details thereof are as under :–
List of Sales above Rs. 10 Lakhs
Sr. No. Name of the company Amount of Sale
1. Gitanjali Lifestyle Ltd. 60,34,35,442
2. VNM Jewel Crafts Ltd. 32,24,66.335
3. Reliance Financial Ltd. 32,02,99,601
4. LG Electronics Ltd. 10,01,50,112
5. Ambuja Cement Ltd. 5,17,95,177
6. Reliance Web Store Ltd. 4,71,96,517
7. Hindustan Unilever Ltd. 2,58,01,635
8. ACC Ltd. 2,06.85,523
9. Bayer Cropscience Ltd. 1,88,70,145
10. Kerala State Financial Enterprises 1,67,00,413
11. Reliance Communications Ltd. 1,3,72,926
12. Hyderabad Industries Ltd. 1,15,70,278
13. Gigabyte Technology India Pvt. Ltd. 1,05,47,192
14. Carestream Technology India Pvt. Ltd. 75,30,687
15. J.K. Cement Works 51,02,178
16. S.K. Gold 41,66,515
17. Bennet. Coleman 36,53,625
18. Solution Integrated Mktg. Services Pvt. Ltd. 32,26,361
19. Kurakose Joseph 27,74,712
20. Survanarayan Estates 19,67,166
21. Reliance Capital Ltd. 19,01,294
22. Rashi Peripherals Pvt. Ltd. (CO.) 18,51,869
23. Aradhana Drinks 17,48,979
24. R P S Chauhan 15,93,039
25. Avnet India Pvt. Ltd. 15,00.042

(2021) ABC 235
26. Jaypce Capital Services Ltd. 14,91,090
27. Post Master Surendra nagar 14,60,412
28. R. Murali 14,22,055
29. V. Venkateswaran 12,05,464
30. Arignar Anna Sugar Mills 11,73,250
31. Neon Laboratories Ltd. 11,63,120
32. Reliancve General Insurance Co. Ltd. 10,46,911
33. Perambalur Sugar Ltd. 10,23,643
34. Royal Images Marketing Pv. Ltd. 10,15,883
35. Others 1481,539.766
36. Total 3092,488,455
List of purchase above Rs. 25 Lakhs
Sr. No. Name of the company Amount of Purchase
1. Gitanjali Lifestyle Ltd. 4,35,85,077
2. Quant Commodities Pvt. Ltd. 49,33,65,589
3. Reliance Financial Ltd. 33,34,99,518
4. Riddi siddhi Bullions Ltd. 3,10,59,845
5. Sidhi Vinayak Vyapar Pvt. Ltd. 3,02,58,911
6. Scotia Mokatta - The Bank of Nova 181,85,65,958
7. VNM Jewel Crafts Ltd. 21,53,24,172
8. Vat Input Credit 1,49,98,353
Total 2980,657,424
The assessee before PCIT filed the complete details and the list of sale of gold
above Rs. 10,00,000/- and list of purchase of gold above Rs. 25,00,000/-
before the PCIT to explain. According to PCIT, the loss claimed on this
amount is speculation loss and therefore is not liable for set off against its
normal business income and finally in Para 13, the PCIT holds as under :–
“......... The loss claimed on this account is speculation loss and therefore, not
to be allowed for set off against its normal business income. In any case,
the AO has not made any inquiry/investigation in this regard, before
completing the assessment order, hence, the same assessment order to
my considered opinion is erroneous as well as prejudicial to the interest
of the Revenue within the meaning of Section 263 of the Act.”
13. Now, before us the learned Counsel for the assessee explained that
assessee vide letter dated 25.10.2013 filed details in respect of purchase and
sale of gold coins in which the payment was made by way of forward
brokerage trade settlement and qua this a reply was filed before the AO in lieu
of query. The assessee now explained the complete business module before us
as well as before PCIT which is reads as under :–
“……The company was successful in the tender process of sale of gold
coins through post office initiated by India post. The tender required the
company to sale only Swiss minted gold coins of various denomination
to be sold through the India post Offices. Accordingly, the company
purchases Swiss minted golds coins from Ban of Nova Scotia and
subsequently supplied and stored these god coins at the post offices as
well as company’s branches for sale.
The same price of gold coins used based on daily price of gold and not fixed
at the purchase price. Hence, company needs to hedge against the price
movement of gold. The company used gold futures at Multi commodity
exchange to achieve this purpose.
At the time of every purchase of gold coins an equal quantity (weight) of
gold coins’ futures was sold on multi-Commodity Exchange (MCX) to
hedge.
Daily a report used to get generated of the quantity (weight) of gold coins
sold and an equal quantity of gold futures are bought back in order to
unwind the hedge.
In order to execute these, services MCX registered broker is required as per
the exchange stipulation. Reliance Commodities Limited (RCL) is a
MCX registered commodity broker and accordingly, the services of it
was used by the company to execute the gold future traders.
In order to execute these trades, the company has to place a margin amount
with RCL, as per the stipulation by the MCX, the margin requirement
vary based on the outstanding number of contracts. The margin amount
place with RCL at the year-end was for the outstanding contracts of gold
futures open at MCX.”
The assessee has filed the complete details of forward brokerage trade
settlement of Rs. 6,025,9,311/- and the assessee realized loss of Rs.
6,58,66,270/-and there is unrealized profit of Rs. 33,56,959 and the net loss is
at Rs. 6,025,9,311/-. The learned Counsel for the assessee also stated that this
issue is as per the provisions of explanation to Section 43(5) of the Act
(2021) ABC 237
wherein, speculative transaction is defined and he explained that in the
present case the delivery of gold is taken by the assessee and hence, the
transaction cannot be called as speculative in nature because Sub-Section 5 of
Section 43 clearly stated that the transaction in which the contract for
purchase or sale of any commodity is settled otherwise then by actual delivery
or transfer of commodity or script i.e. cannot be speculation transaction. But
in the present case the assessee has taken actual delivery as noted by PCIT in
his order even though payment is made by cash for purchase of gold. The
learned Counsel for the assessee further explained that even instruction No.3
of 2010 issued by CBDT dated 23-03-2010 is not applicable i.e. there is mark
to market loss but there is a profit and he relied on the decision of Hon’ble
Supreme Court in the case of CIT v. Woodward Governors India (P.) Ltd.,
(2017) 3 ITJ Online 5 (SC) : (2009) 13 ITJ 1 : (2011) 2 STD 303 : (2009)
312 ITR 254 : (2009) 223 CTR 1 : (2009) 179 Taxman 326 : (2009) 21 DTR
106. In view of this argument the learned Counsel for the assessee stated that
there is no unrealized loss and the question of applying instruction No. 3 as
applied by the PCIT does not arise. According to the learned Counsel the
issue is covered by the decision of the Hon’ble Supreme Court in the case of
Woodward Governors India (P.) Ltd., (supra). He also stated that the
complete details in respect to this loss is filed before the AO during the course
of assessment proceedings in lieu of query raised and it is presumed that the
AO has applied his mind to the facts of the case and passed an appropriate
order.
14. The another issue in this appeal of assessee is against the order of PCIT in
holding the assessment order as erroneous and prejudicial to the interest of the
Revenue for the purpose of claim of long term capital loss of shares. The AO,
according to the learned Counsel, he examined the details of sale of shares of
the following three companies which were sold at cost reads as under :–
Name of the company Sold to whom NO of Sale price
shares of share
Reliance Spot Exchange Reliance Exchange 24,500 10

Infrastructure Ltd. Next Ltd.
Bombay Stock Exchange Reliance Capital 1,30,000 115

Ltd
National Multi-Commodity Reliance Capital 16,666,66 65

Exchange Ltd. Ltd. 7
The learned Counsel for the assessee stated that the shares of the above
companies are still held by RCL and Reliance Exchange Next Ltd. as evident
from the schedule of investments appearing in the financial statement of
Reliance Capital Ltd. and Reliance Exchange Next Ltd. as on 31.03.2015. The
learned Counsel for the assessee referred to the details of the assessee’s paper
book at page 132-137, which were filed before the AO also during the course
of assessment proceedings. The learned Counsel for the assessee also drew
our attention to the fact that the shares of the above companies were sold at
cost on which the same were purchased and therefore, there was no profit or
loss but the loss has arising only on account of the provisions of the Act
requiring the assessee to adopt the indexed cost because these shares are held
for long term purposes, i.e. beyond one year. The learned Counsel also
explained that the assessee has recovered the entire investment and there is no
impairment in respect to thereof. The learned Counsel for the assessee relied
on the decision of the Hon’ble Supreme Court in the case of CIT v. Gillandes
Arbuthnot & Co., (1973) 87 ITR 407 (SC) for the proposition. The learned
counsel for the assessee also drew our attention to page 48 of assessee’s paper
book, wherein complete details of statement of long term capital loss is filed
and also filed before the AO during the course of assessment proceedings.
The relevant details read as under: -
Scrip Purch Purchase Inde Indexed Sale Sale Hkomimio
ase Amount xed Cost Date Proceeds hi
Date Fact
or
Relianc 25.02. 245.000 582 299.304 23.07 245,000 (54.304.00

e Spot 09 00 00 .10 00 )
Exchan
ge India
Limited
Bomba 24.03. 15.000.00 582 18.324. 24.06 15.000,00 (3.324.242

y Stock 09 0 00 742 00 .10 0 00 .00)
Exchan
ge
Limited
Nationa 20.12. 108.333,3 582 132.345 20.09 108.333,3 (24.012.03

l Multi- 08 55.00 .387 00 .10 55.00 2.00)
Commo
dity
Exchan
ge
Relianc 23.03. 161.783.0 582 197.642 24.02 12.480 00 (186.182.0

e 09 0 00 .11 0)
Money
Hong
Kong
Limited
(2021) ABC 239
151 110,090,8 (27.576.24

167,07’. 35.00 0 00)
UO
The learned Counsel for the assessee drew our attention to the notice issued
u/s. 142(1) No. DCIT 1(3)/Notice/2013-14 dated 13.05.2014, wherein vide
question No. 15. This particular issue was a queried by the AO, the relevant
query which reads as under :–
“15. In case of capital gains please provide a comprehensive chart with
regard to STCG/LTCG as well as Dividend received. In case of capital
loss whether the loss bas been adjusted after dividends in terms of
Section 94(7) of the Act.”
According to the Counsel, this was replied by the assessee vide Para 16 of the
reply dated 17.01.2014 and the same reads as under :–
“16. In the return of income, our client has claimed long term capital loss
of Rs. 4,10,76,240/-. While computing the capital gain/loss at the time of
filing of return of income, erroneously the sale proceeds received on sale
of shares of Bombay Stock Exchange Ltd. were taken at Rs. 15,00,000/-
instead of Rs. 1,50,00,000/- thereby resulting in erroneous claim of loss
of Rs. 1,68,24,742/-. The correct figure of loss of slae of shares of
Bombay Stock Exchange Ltd. is Rs. 33,24,742/-. Our client therefore
submits that long term capital loss for the year should be taken at Rs.
2,75,76,240/- instead of loss claim of Rs. 4,10,76,240/- in the return of
income. The above error was purely unintentional and on realization of
same, revised working along with support for sale is enclosed as
Annexure 17.”
In view of the above the learned Counsel for the assessee stated that the
complete details in respect of this transaction was filed before the AO and
after having satisfied himself, he accepted the loss and even now according to
the learned Counsel the PCIT could not point out what is the error in claiming
this loss, he only wanted to revise the assessment that no inquiry is carried
out, whereas complete enquiry was made by the AO before passing
assessment order.
15. As regards the next issue on claim of depreciation on cost of
improvement of lease hold premises u/s. 32(1) of the Act. The PCIT only
stated that the assessee has sold/transfer the lease hold premises during the
year on account of demerger of its infrastructure division but no details, on
the effect and accounting treatment given as a result of demerger, has been
filed or called or verified by the AO. On this, the learned Counsel for the
assessee drew our attention to the scheme of demerger of infrastructure
undertaking between the assessee and Reliance Capital Asset Management
Ltd. as per which various assets and liabilities were demerged and demerger
was approved by Hon’ble Bombay High Court and Hon’ble Gujarat High
Court. It was explained that vide note No. 14 of Schedule 16 gives broad
headwise transfer of assets of such demerger and fixed asset of Rs.
4,53,81,530/- were transferred. The assessee has filed a complete detail,
which are reflected in Schedule 4 of the fixed assets and the details reads as
under :
Gross Accumulate
Asset Net asset
Block depreciation
Leasehold 3,41,76,54
6,13,49,097 2,71,72,549
Improvements 8
Furniture & Fixrures 3,01,805 38,250 2,63,555
1,26,63,777 49,49365 77,14,412
36,91,189 4,64,174 32,27,015
4,53,81,53
Total 7,80,05,868 3,26,24,338
0
The learned Counsel for the assessee argued that the PCIT could not
appreciate the fact that the sale of lease hold premises and improvement
thereon is stated to be Rs. 2,71,72,549/- is not sale value but it is accumulated
depreciation which is removed from the schedule of fixed assets on account of
transfer of assets and demergers. According to learned Counsel, the PCIT has
not understood the issue and simply directed for the revision of order in the
absence of details, whereas complete details were filed before AO which are
available in assessee’s paper book pages 223-227. In view of this, the learned
Counsel for the assessee stated that the complete information was with the
AO which was filed during the course of assessment proceedings and the
PCIT has not looked into the same while passing of revision order u/s. 263 of
the Act.
16. As regards to the another issued of deduction of lease rent and
improvement expenditure, the learned Counsel for the assessee stated that the
findings of PCIT regarding claim of lease rent and improve expenditure that
the details are not filed and all these aspects are not looked into/inquired upon
by the AO while framing the assessment and it is without any basis. The
learned Counsel for the assessee drew our attention to notice issued by the AO
u/s. 142(1) of the Act dated 30.05.2013, wherein vide question No. 19 the AO
has asked the details of merger expenses including breakup and nature. The
learned Counsel for the assessee drew our attention to the complete expenses
of rent rates and taxes and details of rent premises which are filed before the
AO vide letter dated 17.01.2014. The learned Counsel for the assessee also
informed that the assessee has debited the sum of Rs. 56,41,858/- as property
tax under the head rates and taxes and the details were submitted before the
AO. It was further explained that premises on leave and license basis from
Uptown Properties And Leasing Properties Pvt. Ltd. vide agreement dated
(2021) ABC 241
12.10.2007 was taken on lease and the same was evicted on 04.06.2009. It
was stated that, the complete expenditure was paid as per agreement and
reimbursement of municipal taxes was on actual basis at the rate of bills. In
view of the above, it was argued by the learned Counsel for the assessee that
compete details were filed before the AO during the course of assessment
proceedings on a query from the AO and after satisfying the AO has passed
the order u/s. 143(3) of the Act.
17. Finally, the learned Counsel for the assessee argued that it is not in the
hand of the assessee as to how the AO will write the assessment order or what
he incorporates in the assessment order and that does not tantamount to non-
application of mind. For this proposition, he relied on the decision of the
Hon’ble Bombay High Court in the case of CIT v. Gabriel India Ltd., (2016)
1 ITJ Online 948 (Bom) : (1993) 203 ITR 108 : (1993) 114 CTR 81 : (1993)
71 Taxman 585. He further relied on the decision of the CIT v. Reliance
Communication Ltd., (2016) 240 taxman 655 (Bom) : (2017) 396 ITR 217,
wherein the similar issue of cash credit of FCCB’s was before the Hon’ble
Bombay High Court and the CIT while revising the assessment by holding
that the AO has not enquired into or investigated into the credit worthiness of
actual subscribers or genuineness of the transaction. He stated that the
Hon’ble High Court has quashed the revision order passed by CIT u/s. 263 of
the Act. Similarly, the learned Counsel also relied on the Hon’ble Bombay
High Court decision in the case of CIT v. Gera developments (P.) Ltd., (2016)
240 Taxman 467 (Bom) : (2016) 387 ITR 691. In view of the above the
learned Counsel for the assessee asked the bench to quash the revision
proceedings as there is no lack of enquiry or there is no lack of evidence
which were submitted before the AO during the course of assessment
proceedings. According to him, the AO has properly applied mind and each
having information in relation to every issue was before him. Accordingly, he
urged the bench to allow the appeal of the assessee
18. On the other hand, the learned CIT DR, Shri K.B. Shukla heavily relied
on the order of PCIT and asked the bench to confirm the order of PCIT, as
there is no prejudice caused to the assessee because AO will decide these
issues afresh. But, he could not rebut the facts submitted by the assessee in its
paper books.
19. We have heard the rival contentions and gone through the facts and
circumstances of the case. The above brought out facts are in disputed and its
fact on all the issues the assessee has filed complete detail before the AO in
lieu of queries raised to verify the details as noted above. The entire facts
brought out in the above order are supported by the evidences. As regards to
the share application money, we find that AO has examined everything and
even the nature of transaction in regard to the issue of share and it is also a
fact that this investment was made on the basis of erosion of loss of the
company as on 31.03.2011, wherein, paid up capital resulting in an erosion of
its capital and amounts have been paid on a going concern basis on the
understanding that finance will be available with the company for work-in-
capital requirement from its promoters. In view of the above, we are of the
view that the observations of PCIT that huge investment made in loss making
company by paying a premium of Rs. 20 per share does not make commercial
sense and investment ought to have looked into closely is of no consequence
because the promoter has brought in the funds by way of preference shares as
their holding was 62%. From the terms of preference shares issued it can be
seen that the same was redeemable at premium of Rs. 20 per share and the
premium was required to be refunded by the company on its redemption.
Hence, funds were brought in by the promoters and on the terms which cannot
be said to be prejudicial to the interest of the Revenue. In view of the above,
huge investment in quantity and that also preferential share was a commercial
decision by a businessman and the Revenue has no authority to question the
same. Another observation of the PCIT that the investment by RMML in the
shares of assessee’s company by borrowing funds from its associate
companies that’s why a huge loss making company was made as subsidiary
by RMML is also without any basis for the reason that RMML has brought
funds from its associate company is not at all correct as RMML had issued
preferential shares and utilized the same proceeds to make investment in the
capital. We find that the RMML obtain the funds from RCL in the form of
preferential shares and RMML acquiring stake in a holding company does or
does not make any commercial sense, it is a businessman decision and same
cannot be questioned now by PCIT or Revenue. It is also a fact that RMML is
a promoter of the company and they have infused funds into the company
from their survival or revival and it is a common knowledge that the
promoters have to invest huge funds for managing the affairs of the company
and more particularly when the investee company is making loss. The
assessee proved this fact that this business was growing and therefore funds
were required and turnover in subsequent years went up to Rs. 785 crores in
2012 and Rs. 1356 crores in 2013. It is also a fact that this transaction of issue
of preferential shares of RMML and transfer of funds from RCL to RMML
has no tax implication. This was explained before us that the assessee had
issued preferential shares to RMML, the source of which were explained and
also it is confirmed by PCIT while adjudicating the issue. It is only the
conjuncture of surmises of the PCIT that there is façade in respect to issue of
preference shares by the RML at huge premium to transfer funds from RCL to
assessee threw the conduit. We are of the view that the AO is required to look
into the source of funds by way of share capital, which has been confirmed by
the PCIT that the funds are fully explained. To confirm this the assessee
explained vide letter dated 27.01.2014, whereby copy of board resolution
allotting of shares of RMML was submitted which shows that the shares were
allotted on 07.09.2010 and this fact was filed during the course of assessment
proceedings. In view of these facts and details filed before the AO, we are of
the view that the assessment order is neither erroneous nor prejudicial to the
(2021) ABC 243
interest of the Revenue because the source of share is fully explained and
even source of source is also explained.
20. As regards to the issue of demerger of infrastructure division into
Reliance Capital Asset Management Company Ltd., we find that the scheme
of an arrangement of demerger approved by Hon’ble High Court of Bombay
and Hon’ble High Court of Gujarat, looked into all the aspects before
approving the schemes of demerger and now the PCIT cannot raise any
question on the judgment of Hon’ble High Courts. We are of the view that
when the scheme and orders of Hon’ble High Courts are in public domain and
the same are also filed with the Registrar of companies (ROC), the same
cannot be questioned by the Revenue and moreover in the revision
proceedings u/s 263 of the Act. We find that the same was filed and this was
very well noticed by the AO while framing assessment and even that
authorities below cannot take any adverse view on the issue of scheme of
arrangement i.e. demerger of infrastructure undertaking from the assessee
company because Hon’ble High Courts have approved the same. Even
otherwise on merit also as an effect of demerger scheme, the loss of the
company which were brought forward will be carry forward by the assessee
company and thus available loss of the assessee’s company to have been
reduced for carry forward purpose and this cannot be considered as prejudicial
to the interest of the Revenue or even no error has caused to the Revenue.
Accordingly also the order AO cannot be held to be erroneous or prejudicial
to the interest of the Revenue.
21. As regards to the issue of claim of deduction towards return of referral
fee, we find that on the instructions of IRDA who is the controlling authority
for Insurance business, this amount was refunded and during the year under
consideration no referral fee has been received, which is part of this refunded
amount. Thus there is no rendering of service during the year and services
were rendered in the earlier years. Therefore, we agree with the assessee that
if any enquiry is to be made qua this income or assessment of the income in
the hands of the assessee that can only be made in A.Ys. 2008-09 and 2009-
10 and not in the relevant A.Y. 2011-12. We are of the view that the
transaction of debit of referral charges during the year in the profit and loss
account is nothing but writing off of income which was previously received
and offered to tax. We find from the facts of the case that the AO has
examined this issue by making a query and the same was replied by the
assessee and this aspect has also been considered while framing assessment of
RCIBL, wherein, the same AO has framed assessment only on 30.01.2014,
which is also the same date when the assessment in the present case was
framed. We find that these amounts are not in doubt or the genuineness of the
same is doubted neither by the PCIT or the AO during the course of
assessment proceedings. Hence, the assessment order cannot be said to be
erroneous so as to prejudicial to the interest of the Revenue. Accordingly, the
revision order passed by PCIT on this issue is without any basis.
22. In respect to another ground of claim of deduction towards loss incurred
on forward brokering trade settlement, we find that the assessee company is
into distribution of gold coins to retail customers and to cover the risk of price
fluctuation of gold, it hedged the gold position with MCX exchange on mark
to market position and is accounted under the head Forward brokering Trade
settlement. For this issue of hedging, it was explained that there is a
considerable gap between the date of purchase and the date of sale and the
company needs to hedged the same against the price movement of gold and
company used gold futures at MCX to achieve this purpose. The assessee has
filed the complete details of forward brokerage trade settlement of Rs.
6,025,9,311/- and the assessee realized loss of Rs. 6,58,66,270/-and there is
unrealized profit of Rs. 33,56,959 and the net loss is at Rs. 6,025,9,311/-. As
explained by the learned Counsel for the assessee that this issue is as per the
provisions of explanation to Section 43(5) of the Act wherein, speculative
transaction is defined and he explained that in the present case the delivery of
gold is taken by the assessee and hence, the transaction cannot be called as
speculative in nature because Sub-Section 5 of Section 43 clearly stated that
the transaction in which the contract for purchase or sale of any commodity is
settled otherwise then by actual delivery or transfer of commodity or
script i.e. be speculation transaction. But in the present case the assessee has
taken actual delivery as noted by PCIT in his order even though payment is
made by cash for purchase of gold and even instruction No. 3 of 2010 issued
by CBDT dated 23.03.2010 is not applicable i.e. there is mark to market loss
but there is a profit. We are of the view that the case law relied on by the
assessee on the decision of Hon’ble Supreme Court in the case of Woodward
Governors India (P.) Ltd., (supra), wherein the issue as regards to foreign
exchange speculation loss provision is allowed on the basis of mark to market
loss. We find that in the present case there is no unrealized loss and the
question of applying instruction No. 3 as applied by the PCIT does not arise
and hence this issue is covered by the decision of the Hon’ble Supreme Court
in the case of Woodward Governors India (P.) Ltd., (supra). Even otherwise
the complete details in respect to this loss is filed before the AO during the
course of assessment proceedings in lieu of query raised and it is presumed
that the AO has applied his mind to the facts of the case and passed an
appropriate order. Hence, the assessment order cannot be said to be erroneous
so as to prejudicial to the interest of Revenue on this issue.
23. As regards to the issue of claim on long term capital loss on sale of
shares, we find that the shares of the above companies are still held by RCL
and Reliance Exchange Next Ltd. as evident from the schedule of investments
appearing in the financial statement of RC Land Reliance Exchange Next Ltd.
as on 31.03.2015. We find from the details filed in the assessee’s paper book
at pages 132-137, which were filed before the AO also during the course of
assessment proceedings that the shares of the above companies were sold at
cost on which the same were purchased and therefore, there was no profit or
loss but the loss has arising only on account of the provisions of the Act
(2021) ABC 245
requiring the assessee to adopt the indexed cost because these shares are held
for long term purposes, i.e. beyond one year. We find that the assessee has
recovered the entire investment and there is no impairment in respect to
thereof and this issue is covered by the decision of the Hon’ble Supreme
Court in the case of CIT v. Gillander Arbuthnot and Co., (supra) for the
proposition. Hence, on this issue the assessment order is neither erroneous nor
prejudicial to the interest of the Revenue.
24. As regards the next issue on claim of depreciation on cost of
improvement of lease hold premises u/s. 32(1) of the Act, we find that the
claim of the Revenue that the assessee has sold/transfer the lease hold
premises during the year on account of demerger of its infrastructure division
but no details, on the effect and accounting treatment given as a result of
demerger, has been filed or called or verified by the AO. But, on the contrary
we find that this was done as per the scheme of demerger of infrastructure
undertaking between the assessee and Reliance Capital Asset Management
Ltd. as per which various assets and liabilities were demerged and demerger
was approved by Hon’ble Bombay High Court and Hon’ble Gujarat High
Court. It was explained that vide note No. 14 of Schedule 16 gives broad head
wise transfer of assets of such demerger and fixed asset of Rs. 4,53,81,530/-
were transferred. We find that the sale of lease hold premises and
improvement thereon is stated to be Rs. 2,71,72,549/- is not sale value but it is
accumulated depreciation which is removed from the schedule of fixed assets
on account of transfer of assets and demergers. We find from the facts of the
case that the assessee filed complete details before AO which are available in
assessee’s paper book pages 223-227. Once it is a fact that this accumulated
depreciation amounting to Rs. 2,71,72,549/- is not sale value, which is
removed from fixed assets on account of transfer of assets and demerger of
the companies. Even otherwise the complete details were available before the
AO during the course of assessment proceedings, which were filed by the
assessee on query from the AO. In term of the above factual position, we are
of the view that the assessment order framed under 143(3) of the Act is
neither erroneous nor prejudicial to the interest of the Revenue.
25. As regards to the next issue on lease rent and improvement expenditure
the AO enquired the issue by raising a query u/s. 142(1) of the Act dated
30.05.2013, wherein vide question No. 19 the AO has asked the details of
merger expenses including breakup and nature. We find that complete
expenses of rent rates and taxes and details of rent premises which are filed
before the AO vide letter dated 17.01.2014, wherein, the assessee has debited
the sum of Rs. 56,41,858/- as property tax under the head rates and taxes and
the details were submitted before the AO. It is a fact that this premise was
taken on leave and license basis from Uptown Properties And Leasing
Properties Pvt. Ltd. vide agreement dated 12.10.2007 and the same was
evicted on 04.06.2009. We find that the assessee has incurred the expenditure
as per agreement and reimbursement of municipal taxes was on actual basis at
the rate of bills. In view of the above, we are of the view that the assessee has
filed that compete details were filed before the AO during the course of
assessment proceedings on a query from the AO and after satisfying the AO
has passed the order u/s. 143(3) of the Act. The order of the AO cannot be
said to be erroneous so as to prejudicial to the interest to the Revenue on these
facts.
26. As regards to lack of enquiry during the assessment proceedings or no
discussion in the assessment order issue cited above, Hon’ble Bombay High
Court in the case of CIT v. Gabriel India Ltd., (supra) has held that in case the
ITO has made enquires in regard to the nature of expenditure incurred by the
assessee and assessee has given a detail explanation in that regard by replying
the queries, the decision of the ITO could not to be held to be erroneous
simply because his order did not make elaborate discussion in this regard.
Moreover, all these documents are part of the record of the case and even the
claim was allowed by the ITO on being satisfied with the explanation of the
assessee. Even the CIT himself, even after initiative proceedings for revision
u/s. 263 of the Act and hearing the assessee could not say that the allowance
of the claim of the assessee was erroneous and that the expenditure was not
revenue but was capital in nature. Another case relied on by the assessee of
Hon’ble Bombay High Court in the case of Reliance Communication, (supra)
had considered the issue of cash credit in the nature of FCCB’s i.e. Foreign
Currency Convertible Bonds raised by the assessee during the year under
consideration was accepted by the AO while completing the assessment and
subsequently the CIT noticed that no investigation was carried out by the AO
to establish the capacity and genuineness of the transaction. The CIT passed
revision order and Tribunal set aside the revisional order. On further appeal
Hon’ble High Court confirmed the order of Tribunal by observing that the AO
has made detailed enquiries about the aforesaid facts and mere fact that he did
not make any reference to the said issue in the reference order, the assessment
order cannot be set to be erroneous so as to prejudicial to the interest of the
revenue. Hon’ble High Court held in Paras 9 to 11 as under :–
“9. That decision refers to the Assessment Year 1998-99 where the
assessee filed return of income of Rs. 661.15 crore and claimed
deduction in the sum of Rs. 11.41 crores under Section 80-1, Rs. 21=8.62
crore under section 80-IA and Rs. 20.20 crores under Section 80-HH.
The Assessing Officer assessed the income under Section 43(3) at Rs.
814.66 crores and restricted the deduction claimed to the sum or figure
quoted in paragraph 3 of the order. The Commissioner noticed on
verification of the records that the expenditure having a bearing on the
profits of the units had not been considered for allocation. The
Commissioner found that in the exercise carried out by the Assessing
Officer there was indeed an error and the order of the Assessing Officer,
therefore, is erroneous insofar as it is prejudicial to the interest of the
Revenue. The rival contentions have been noted and in dealing with
them, the Division Bench found that the Tribunal has interfered with a
finding by proceeding on the basis that during the course of assessment,
(2021) ABC 247
the Assessing Officer made a specific query. This query was with
reference to the deduction under the three sections, that assessee gave
reply for each and every item qua this deduction which was enquired into
by the Assessing Officer. That was replied one by one. It is only
thereafter that the Assessing Officer accepted the claim of the assessee.
According to the Division Bench, there was patent fallacy in the
approach of the Tribunal inasmuch as the Assessing Officer sought
explanation on why certain expenditure should not be allocated and the
reply of the assessee contained virtually no material or details to
establish that there was no direct nexus between the expenditure incurred
under the heads in question and the business of the undertakings with
reference to which the deduction was claimed. If there was a general
explanation given that the expenditure, namely, capital on scientific
research had not been incurred at the undertakings and is not directly
linked to the operations of the undertakings but the facts to the
knowledge of the assessee were not revealed, then, that was no
explanation at all. Once that was no explanation, much less acceptable,
then, the Assessing Officer should not have proceeded on the lines
indicated by the Commissioner as that was a complete error. That
resulted in his order being erroneous and prejudicial to the interest of the
Revenue. It is in dealing with that situation so also the contention by the
assessee of having supplied the relevant details and giving a point to
point reply that the observations relied upon by paragraph 17 by Mr.
Tejveer Singh have been made. That must be seen in the backdrop of the
facts. In such circumstances, when the order in that case was found to be
erroneous insofar as it is prejudicial to the interest of the Revenue that
the Commissioner rightly stepped in.
10. In the case before us, the concession of the assessee’s authorized
representative apart, what the Tribunal found and on all the three items
highlighted by Mr. Tejveer Singh is that there were materials before the
Assessing Officer. The Assessing Officer made enquiries about the
above referred aspects and which have been noted by the Commissioner.
The assessee made submissions by placing all relevant documents before
the Assessing Officer. Thus the case does not fall within the parameters
laid down in the decision of the Hon’ble Supreme Court and other High
Courts. The mere fact that the Assessing Officer did not make any
reference to these three issues in the assessment order cannot make the
order erroneous when the issues were indeed looked into. The entire
details were filed and the order itself indicates that it can be inferred that
the Assessing Officer not only made enquiries, but satisfied himself with
the assessee’s replies furnished from time to time in support of its stand.
When the Tribunal concludes in this manner and finally in paragraph 16
holds that the Assessing Officer took a perfectly correct or a possible
view, then, the order passed by him cannot be termed as erroneous
insofar as it is prejudicial to the interest of the Revenue. The
Commissioner of Income Tax was not, therefore, justified in invoking
section 263 of the Act.
11. We are of the view that the Tribunal’s order and conclusions are
essentially on facts. They cannot be termed as perverse and after it
adverted to the rival contentions and all the materials on record. The
Tribunal’s order cannot thus be held to be vitiated by an error of law
apparent on the face of record so as to call for interference in our further
appellate jurisdiction. The appeal, therefore, does not raise any
substantial questions of law, but the attempt of the Revenue is to have a
re-appreciation and reappraisal of the same factual material. That is
impermissible. The appeal is, therefore, devoid of merits and is
dismissed. No order as to costs.”
27. In our opinion, an order cannot be termed as erroneous unless it is not in
accordance with law and if the AO acting in accordance with law frames an
assessment, it cannot be branded as erroneous by the Commissioner simply
because in his opinion the order should have been written more elaborately.
Section 263 does not visualize a case of substitution of the judgment of the
Commissioner for that of the AO who passed the order unless the decision is
held to be erroneous. Where the AO has exercised the quasi-judicial power
vested in him in accordance with law and arrived at a conclusion such a
conclusion cannot be found to be erroneous simply because the Commissioner
does not feel satisfied with the conclusion. Section 263 is a section which
enables the Commissioner to have a look at the orders or proceedings of the
lower authorities and to effect a correction, if so needed, particularly if the
order or proceeding is erroneous and prejudicial to the interest of the
Revenue. The object of the provision is to raise revenue for the State and
Section 263 is an enabling provision conferring jurisdiction on the
Commissioner to revise the order of the authorities below in certain
circumstances particularly when it is erroneous and prejudicial. The provision
is intended to plug leakage to the revenue by erroneous order passed by the
lower authorities where the order of assessment by the AO is erroneous and
prejudicial to the interest of the Revenue. But in the present case before us the
AO has passed the assessment order after examining all the details, replies
and documents filed by the assessee. In view of our observations hereinabove
and judicial decisions of the various High Courts, we are of the considered
view that revisionary order u/s. 263 of the Act is wrong and accordingly
quashed.
___________

Mukesh R. Marolia
(2021) ABC 249
v.
Addl. Commissioner of Income Tax, Rg-15(2)
DR. O.K. Narayanan, AM and Shri Rajesh Kumar, JM
ITA No. 1201 (Mum) of 2005
15th December, 2005
Additions & Disallowances-Long Term Capital Gains-Deduction Claimed-
U/s. 54E of Income Tax Act,1961- the Assessing Officer held on the basis of
enquiries made by him that the claim of the assessee regarding purchase of
shares was bogus and no such shares were purchased by the assessee and
consequently the sale of shares also was bogus. Therefore, the Assessing
Officer came to the conclusion that the funds deposited by the assessee in his
bank account as the sale proceeds of the shares and utilized for the purchase
of flat at Colaba, remained unexplained. The sale proceeds of shares
accounted by the assessee has been treated by the assessing authority as
unexplained money. The sale proceeds of shares was Rs. 1,41,08,484/- The
said amount has been added by the assessing authority under Section 69 of the
Income Tax Act, 1961. Further as a consequence of the above finding, the
Assessing Officer declined the claim of deduction made by the assessee under
Section 54E. In effect, the amount invested by the assessee in the purchase of
residential flat at Colaba, Mumbai has been treated by the assessing authority
as unexplained investment and further perpetu-ated by the refusal to grant
deduction claimed by the assessee under Section 54E, which of course is only
an inevitable consequence. There were another two credits in the bank
statement of the assessee’s minor son which totalled to Rs. 6,61,063. The
Assessing Officer has added this amount also as unexplained investment
under Section 69. Another deposit of Rs. 2 lakhs was in the account of
assessee’s minor daughter. According to the assessee, the said amount was
gifted to his daughter by his co-brother who is a non-resident. The payment
was routed through NRE account. But, the explanation was not accepted by
the assessing authority resulting in the addition of Rs. 2 lakhs as unexplained
cash credit under Section 68
-Held-
-For a moment, even if all the above evidences are ignored, one cannot
overlook the pressure of the evidence coming out of the survey carried out by
the department in the business premises of the assessee. There was a survey
carried out by the department in the business premises of the assessee. In the
course of survey, contract notes for sale of shares, copies of bills thereof,
photocopies of share certificates etc., were found. The purchase and sale of
shares were also found recorded in the books of account. The department has
no case that the survey was a staged enactment. A survey is always
unexpected. So, it is not possible to presume that the assessee had collected
certain fabricated documents and kept at his business premises so as to
hoodwink the survey party to lead them to believe that the assessee had
entered into share transactions. Atleast such an inference is not possible in

law. The department has no defence against the forcible argument of the
learned counsel that the survey conducted by the department has out and out
upheld the contention of the assessee that he had purchased and sold shares.
We find that this solitary evidence collected in the course of survey is
sufficient to endorse the bona fides of the share transactions made by the
assessee.
-In short on the basis of the internal evidences available with the assessee and
the fact that the sale proceeds were collected through bank accounts and
coupled with the external evidence of survey and statement of parties, we
have to hold that the sale proceeds of Rs. 1,41,08,484/- has been explained.
Therefore, the said addition is deleted.
Unexplained Investments-Additions-addition of Rs. 6,61,063/-. The case of
the assessee was that the amount represented the realization of loan out-
standing with M/s. Rainbow Industries. As per the ledger copy of account of
M/s. Rushab Investments (Page 159 of the paper book), there was an opening
balance as on 01.04.2000 amounting to Rs. 6,61,063.43. There are also
payment entries by cheques for Rs. 1,61,063.43 and Rs. 5 lakhs. This
statement of account has been confirmed by the Proprietor of M/s. Rushab
Industries. He has also furnished his assessment particulars before the
assessing authority. Therefore, in such circumstances, without any further
enquiries and collection of evidence, it is not possible for the assessing
authority to come to a finding against the assessee. The assessee has explained
the availability of cash necessary for making bank deposits with the help of
his accounts and account of copies of the other party along with his
confirmation. In these circumstances, we find that the addition of Rs.
6,61,063.43 is not justified. Therefore, it is, deleted.
Cash Credit-Additions-addition of Rs. 2 lakhs. The assessee has furnished
the details of the remittance of the said amount by Shri Ravindra Kumar
Tailor who is in New Zealand. He is the co-brother of the assessee. He had
issued cheque No. 251788 dated 13.03.2001 drawn on his NRE Account
27622 with Bank of India, Mumbai Central Branch. When the remittance of
money is supported by banking documents, there is no reason to disbelieve
the version of the assessee and make an addition thereto. It is not justified.
This addition is also therefore deleted

Relevant Provisions : S.143(3), S.54E,S.68 & S.69 of Income Tax Act,1961
Counsel :
(2021) ABC 251
– S.K. Tulsiyan and Paras Seth, for the Appellant;
– R.K. Singh for, the Respondent.
Equivalent Citation : (2006) 6 SOT 247 (Mumbai)
ORDER
Shri Dr. O.K. Narayanan, AM :
1. This appeal is filed by the assessee. The relevant Assessment Year is 2001-
02. It is directed against the order passed by the CIT(A)-XV at Mumbai on
24.12.2004 and arises out of the assessment completed under Section 143(3)
of the Income Tax Act, 1961.
2. The assessee is carrying on the business of manufacturing handkerchief as
the proprietor of M/s. Rumal Manufacturing Company. The assessee had filed
its return of income for the impugned assessment year for a total income of
Rs. 4,28,219/- added by an agricultural income of Rs. 6,000/-. The income
returned by the assessee included business income, income from other sources
and also long-term capital gains on sale of shares and sale of office premises.
3. The assessee had purchased a residential flat at Colaba, Mumbai during the
relevant previous year. The flat was jointly purchased with his wife.
Assessee’s share in the flat is 70 per cent and the share of wife is 30 per cent.
The long-term capital gains declared by the assessee on sale of shares and
office premises were accordingly claimed as deduction under Section 54E as
against the purchase of the said flat. According to the assessee, the investment
in the flat was made out of the sale proceeds of shares and office premises
thereby utilizing the sale consideration for the purchase of eligible asset for
claiming deduction under Section 54E.
4. In the course of assessment proceedings, the Assessing Officer held on the
basis of enquiries made by him that the claim of the assessee regarding
purchase of shares was bogus and no such shares were purchased by the
assessee and consequently the sale of shares also was bogus. Therefore, the
Assessing Officer came to the conclusion that the funds deposited by the
assessee in his bank account as the sale proceeds of the shares and utilized for
the purchase of flat at Colaba, remained unexplained. The sale proceeds of
shares accounted by the assessee has been treated by the assessing authority
as unexplained money. The sale proceeds of shares was Rs. 1,41,08,484/-. In
the above circumstances, the said amount has been added by the assessing
authority under Section 69 of the Income Tax Act, 1961. Further as a
consequence of the above finding, the Assessing Officer declined the claim of
deduction made by the assessee under Section 54E. In effect, the amount
invested by the assessee in the purchase of residential flat at Colaba, Mumbai
has been treated by the assessing authority as unexplained investment and
further perpetu-ated by the refusal to grant deduction claimed by the assessee
under Section 54E, which of course is only an inevitable consequence. There
were another two credits in the bank statement of the assessee’s minor son
which totalled to Rs. 6,61,063. The Assessing Officer has added this amount
also as unexplained investment under Section 69. Another deposit of Rs. 2
lakhs was in the account of assessee’s minor daughter. According to the
assessee, the said amount was gifted to his daughter by his co-brother who is a
non-resident. The payment was routed through NRE account. But, the
explanation was not accepted by the assessing authority resulting in the
addition of Rs. 2 lakhs as unexplained cash credit under Section 68.
5. The above three additions were taken in first appeal. The CIT(A)
considered the grounds raised by the assessee against the addition of Rs.
1,41,08,484/- made by the assessing authority under Section 69. The CIT(A)
confirmed the addition upholding the finding of the assessing authority that
the purchase of shares was bogus. The main thrust of the CIT(A) to arrive at
the above finding was that the share transactions were carried out by the
assessee outside the stock exchange and not through any registered broker.
The CIT(A) held that the responsibility of the assessee is greater in proving
the bona fides of such off-market transactions. In fact, while arriving at his
conclusion, the CIT(A) did not approve the mode of share transactions
adopted by the assessee, off the Stock Exchange. The addition was therefore
confirmed. As an obvious consequence, the disallowance of claim of
deduction under Section 54E was also upheld. Regarding the remaining two
additions also, the CIT(A) agreed with the assessing authority that the
assessee has not proved the bona fides of those amounts. Those two additions
also have been confirmed. The first appeal was accordingly dismissed by the
CIT(A). The assessee is aggrieved and therefore, the second appeal before us.
6. The grounds raised by the assessee in this appeal read as under :
“(1) That on the facts and in the circumstances of the case, the Ld. CIT
(A) erred in having confirmed the high-pitched assessment on an alleged
unexplained investment/income of Rs. 1,54,53,250/- as against returned
by the assessee at Rs. 4,78,290/- without considering the fact that the
purchases and sales of shares and subsequent investment in house
property were made through accounted and disclosed money/source
only.
(2) That on the facts and in the circumstances of the case, the Assessing
Officer and the Ld. CIT(A) acted arbitrarily in having treated the
deposits totalling to Rs. 1,41,08,484/- as unexplained investment under
Section 69 of the Act disbelieving the actual state of affairs that the said
sum was deposited to the Bank out of sale proceeds of shares of different
companies through account payee cheques, the details of which were
made available to the revenue authorities with evidence and also
reflected in the return of income.
(3) That the revenue authorities further erred in not having allowed
deduction under Section 54F in spite of the fact that out of the sale
proceeds of shares amounting to Rs. 1,41,08,484/- and office premises of
Rs. 2,32,358/-, investment towards purchase of a flat was made and
(2021) ABC 253
hence, in terms of Section 54F of the Act, the assessee was entitled to
deduction under that section.
(4) That the revenue authorities acted capriciously in having disbelieved
the source for purchase of shares out of long-term capital gains and
agricultural income and wrongly invoked the provisions of Section 69 of
the Act ignoring the explanation and details of year-wise income from
agriculture which was used for purchase of shares and in support of
which cash book was filed before them and hence, the allegation of non-
genuine transaction is baseless.
(5) That the Assessing Officer and the Ld. CIT(A) grossly erred in
having ignored the confirmations of brokers/sub-brokers/their assistant in
respect of share transactions and invoked provisions of section 69 on
mere suspicion holding that all the transactions were bogus and not
genuine.
(6.a) That the Ld. CIT(A) misdirected himself in having upheld the
addition of Rs. 6,61,063 under Section 69 of the Act being the bank
balance of the minor son on the alleged ground of non-disclosure of cash
deposits as income, in spite of the fact that the said income was already
included in the assessee’s hand under Section 64(1A) and the said sum
represented the refund of outstanding loan credit from Rainbow
Industries through account payee cheques.
(6.b) That the revenue authorities have made the said addition under
Section 69 of the Act on the alleged ground of lack of evidence of such
refund and this Act was arbitrary and uncalled for inasmuch as the
transaction was through banking channel and the identity and
genuineness of the transaction could have been easily found out.
(7) That the learned CIT(A) fell in error in confirming the addition of Rs.
2,00,000/- under Section 68 of the Act being the bank deposit in the
assessee’s minor daughter’s bank account on the alleged ground of lack
of genuineness and creditworthiness, in spite of the fact that the money
was given by assessee’s co-brother as gift through cheque issued on
Bank of India, Mumbai, confirmation and bank statement of the said co-
brother were filed.
(8) That the order of the learned CIT(A) is arbitrary, unwarranted,
without any merit and bad in law, the same should be quashed and the
assessee be given such relief(s) as prayed for.”
7. Before proceeding further, it is necessary to discuss in brief, the facts
relating to the three additions disputed in the present appeal. As far as the
addition of Rs. 1,41,08,484/- is concerned, the facts related to certain
transactions of purchase and sale of shares accounted by the assessee. The
funds necessary for purchasing the flat at Colaba were raised by the assessee
by selling the shares. The sale proceeds of shares were brought into the bank
account of the assessee. According to the assessee, he had purchased 1,41,400
shares of M/s. Allan Industrial Gases Limited; 11,500 shares of Mobile Tele-
communications Limited; 34,000 shares of Rashel Agro Tech Ltd., and
27,700 shares of Centil Agro Tech Ltd. The total number of shares thus
purchased by the assessee was 2,19,600. The purchases were made through
M/s. Rushab Investments, Radha Ashok and Anil Securities. The purchases
were made during the period from February to August 1999 i.e., during the
previous year periods relevant to the Assessment Years 1999-2000 and 2000-
01. All the 2,14,600 shares were sold by the assessee during the period April
2000 to February 2001, which is the previous year relevant to the assessment
year under appeal. The shares were sold through M/s. Richmond Securities
Pvt. Ltd., and M/s. Scorpio Management. The assessing authority made
enquiries regarding the bona fides of the purchase and sale of those shares. He
had issued notice and summons to the concerned parties to explain the nature
of transactions they had with the assessee. The Assessing Officer has
discussed the details of the enquiries conducted by him in a detailed manner
in the assessment order. As a result of the enquiries, Assessing Officer sought
to disbelieve the purchase of shares recorded by the assessee for the following
reasons :
(I) That Radha Ashok, the Broker has informed that he never sold any shares
to the assessee.
(II) That Sandeep D. Shah, proprietor of Rushab Investments stated in his
statement recorded under Section 131 that he never sold any shares to the
assessee.
(III) That the bills issued by Ami Securities were colour photostat copies of
unused bills.
(IV) That National Stock Exchange of India has informed that the shares of
M/s. Mobile Tele Communications Limited said to be sold by Ami
Securities were never available for trading in the capital market segment
of the Exchange.
(V) That Ami Securities was expelled from the membership of the stock
exchange with effect from February 20, 1999.
(VI) That the purchase and sale of shares are not reflected in the records of
Bombay Stock Exchange.
(VII) That assessee had no funds with him for the purchase of the shares.
(VIII)That the interconnected Stock Exchange of India has informed that no
transactions were carried out by Richmond Securities Pvt. Ltd. in respect
of the assessee.
(IX) That another Broker Scorpio Management ceased to be a member of the
National Stock Exchange with effect from February 20, 1999.
(X) That Shri Mukesh Chokshi, Director of Richmond Securities Pvt. Ltd.,
has made a statement that he had not issued any bill to the assessee;
(2021) ABC 255
(XI) That the ADIT (Inv.) at Hyderabad has informed that according to M/s.
Centil Agro Tech., the assessee had never held any of its shares.
(XII)That the assessee did not produce Mr. Sathish stated to be a broker. Even
though the assessee has informed that all the payments except that of Rs.
11,55,750/- were received from M/s. Richmond Securities Pvt. Ltd. The
assessee had also received monies from Rushab Investments and Tripathi
Sales Corporation, but the latter two receipts were not disclosed by him.
The genuineness of the transactions were not established for the failure
of the assessee to identify the real persons behind the brokers through
whom purchase and sale were said to be made.
(XIII)That the assessee could not prove the creditworthiness of the parties
involved in the transactions and also their identity and therefore, has
failed in proving the genuineness of the transactions as such. This failure
is in spite of number of opportunities given by the assessing authority by
issuing notice under Section 142(1).
7.1 On adjudicating the issue of addition of Rs. 1,41,08,484/-, the learned
Commissioner of Income Tax arrived at the following conclusion :
“But the most important point is the veracity of the transactions
conducted by the appellant. The off-market transactions are not
recognized transactions, particularly when all the shares transacted are
quoted shares. When the share transaction is not through Stock
Exchange, greater responsibility is there with the appellant and more
particularly when it is not conducted through a registered broker. If such
off-market transactions are recognized, then what is the necessity of
conducting transactions through Stock Exchange ? What is the need of
the regulatory authority like SEBI. On appreciation of the evidence
collected by the Assessing Officer, both the purchase and sales claimed
to have been made by the appellant are found to be non-genuine. Hence,
the addition made by the Assessing Officer on this account under section
69 of the Act is quite justified. It is, therefore, confirmed.”
7.2 Regarding the next addition of Rs. 6,61,063/-, it was made under section
69 as unaccounted investment against the credits reflected in the bank account
of the assessee’s minor son, Master Pratik. In the course of assessment
proceedings, the Assessing Officer has noticed that the assessee had shown a
sum of Rs. 35,490/- under the head ‘Income from other sources’. This interest
income came out of the bank account of assessee’s minor son. The Assessing
Officer found that there were two deposits in the name of assessee’s minor
son totalling to Rs. 6,61,063/-, the source of which have not been properly
explained. Therefore, it was added. In first appeal, the CIT(A) also agreed that
no evidence was produced by the assessee to prove the source of the sum of
Rs. 6,61,063/- represented by fixed deposits in the name of assessee’s minor
son. The contention of the assessee was that the said amount was outstanding
as a loan credit with M/s. Rainbow Industries at Tardeo, Mumbai. It was
further explained by the assessee that the said amount was repaid by M/s.
Rainbow Industries which was in turn reflected by the fixed deposits.
7.3 The third addition is the amount of Rs. 2 lakhs made under section 68.
This amount has been reflected in the accounts of the assessee’s minor
daughter Miss Zankhana. According to the assessee, the amount was gifted by
assessee’s co-brother. His explanation was not accepted by the assessing
authority as well as the CIT(A). Therefore, the said addition was also
confirmed.
8. The above three mentioned additions confirmed by the CIT(A) are the
subject-matter of this appeal. We will first consider the addition of Rs.
1,41,08,484/-.
8.1 Shri S.K. Tulsian, the learned Counsel appearing for the assessee made
extensive arguments against the addition. His contentions are summarized
below.
8.2 The foremost argument of the learned counsel is that the case of the
assessee regarding purchase and sale of shares was fully supported by the
details collected in the course of survey conducted by the department in the
business premises of the assessee. There was a survey carried out by the
department in the business premises of the assessee. Copies of contract notes
for sale of shares, copies of bills thereof, photocopies of share certificates etc.,
were found in the course of survey. It is the case of the learned counsel that
these details collected by the department by itself is the best testimony for the
case of the assessee that he had purchased and sold shares resulting in capital
gains which was utilized by him for the purchase of flat at Colaba.
8.3 The learned counsel submitted that as far as the share transactions are
concerned, not only the department collected positive evidences in the course
of survey, in support of the accounts of the assessee regarding purchase and
sale of shares, but also to be noted that no incriminating document or
evidence indicating any doubtfulness in the bona fides of the share
transactions were found in the course of survey. It is the case of the learned
counsel that survey was done by the department without any prior notice and
almost surprisingly and therefore, what was found in the course of survey
should be accepted on its face value.
8.4 That the assessee had submitted number of evidences before the assessing
authority to prove the genuineness of the share transactions. The assessing
authority had relied on the negative replies received from Bombay Stock
Exchange, the National Stock Exchange and the Interconnected Stock
Exchange of India to reject the explanations of the assessee without
recognizaing the basic fact that those share transactions were off-market
transactions and obviously there would be no records regarding those
transactions with those stock exchanges. The assessing authority was making
enquiries with those Stock Exchanges knowing that the enquiry results would
be futile. Such negative answers cannot be used against the assessee as
(2021) ABC 257
positive evidence. The Assessing Officer himself knew that those enquiries
would serve no purpose.
8.5 That the fact that summons could not be served on few brokers which has
been used against the assessee, eventhough the identity of the brokers were
not disputed by the assessing authority. The bills issued by those brokers in
respect of share transactions were found in the course of survey itself. The
learned counsel further submitted that the purchases of all the shares were
duly recorded, disclosed in the return of income filed by the assessee for the
Assessment Years 1999-2000 and 2000-01. That the purchases were made out
of the identified and disclosed funds; that the sale of the shares were duly
disclosed in the returns filed by the assessee for the Assessment Years 2001-
02; that the persons through whom most of the purchase and sales were
transacted had confirmed the transactions with the assessee; that the
proceedings from the sale of shares were received by the assessee by account
payee cheques and pay orders. The assessee had produced letters from various
companies confirming the holding of shares by the assessee during the
relevant period. That the purchase and sales of shares were off-market
transactions and as such the communications from various Stock Exchanges
were wholly irrelevant.
8.6 The learned counsel of the assessee further explained on the facts of the
case. He has filed detailed paper book containing such details. The break up
of purchase and sale of shares are furnished. The learned Counsel submitted
that most of the purchase and sale of shares were carried out through Shri
Satish Mandovara, Mediator, who is a specialist in off-market trading of
shares. Shri Satish Mandovara was the Assistant of Shri Mangesh Chokshi,
Director of M/s. Richmond Securities Pvt. Ltd. Both Shri Satish Mandovara
and Shri Mangesh Chokshi in the respective statements recorded under
Section 31 of the Income Tax Act have confirmed that the transactions are
entered into by them with the assessee were genuine. Regarding the source of
investments, the assessee has explained before the Assessing Officer that he
had agricultural income which reflected in the returns filed for the Assessment
Years 1990-91 to 2001-02. The learned Counsel invited our attention to the
cash on hand available with the assessee for various year endings detailed in
the paper book.
8.7 The learned Counsel submitted that the Assessing Officer has erred in
appreciating the statements given by Shri Satish Mandovara. Shri Satish
Mandovara is the proprietor of M/s. Rushab Investments which is different
from the other Rushab Investments referred to by the Assessing Officer. As
the proprietor of M/s. Rushab Investments he has been filing returns of
income. It was also stated by him that he got shares of the concerned
companies transferred in the name of the assessee. The learned counsel
further submitted that the above evidence proved beyond any reasonable
doubt that the assessee had actually purchased and sold shares.
8.8 In fact, denial of Shri Sandeep D. Shah any transaction with the assessee,
the learned counsel submitted that he had categorically stated that as
Proprietor of M/s. Rushab Investments, the business was discon- tinued with
effect from 1997, whereas, in fact the impugned shares were purchased by the
assessee from M/s. Rushab Investments during the accounting Years 1998-99
and 1999-2000. He explained that during this period Shri Satish Mandovara
carried on the business in the name and style of M/s. Rushab Investments and
he has categorically confirmed the sale of the impugned shares to the
assessee. Therefore, the Assessing Officer has erred in relying on the denial of
Shri Sandeep D. Shah.
8.9 The learned Counsel further submitted that even though summons issued
to various companies could not be served, the communications received from
relevant Stock Exchanges proved that those shares were quoted shares which
showed that the transactions entered into by the assessee were genuine.
8.10 Regarding the sale of the shares, the learned counsel submitted that in
the light of statements made available before the assessing authority it was
made clear that the shares were sold through Shri Satish Mandovara who was
an Assistant of Shri Mangesh Chokshi, the Director of M/s. Richmond
Securities Pvt. Ltd. The sales are supported by the details issued by M/s.
Richmond Securities Pvt. Ltd. Payments were issued by cheques. The bank
accounts were identified. Shri Mandovara paid the money to the assessee out
of the collections made from various jobbers. Even the cheques were issued
on behalf of M/s. Richmond Securities Pvt. Ltd. as instructed by Shri
Mangesh Chokshi. It was the case that M/s. Scorpio Management
Consultancy Pvt. Ltd. also that the identity of the said company as a broker
was never doubted. Even though the sales transactions were off-market
transactions, they were documented and supported by various evidences.
8.11 Therefore, the learned counsel submitted that there is no basis for
sustaining an addition of Rs. 1,41,08,484/-.
9. Shri R.K. Singh, the learned Commissioner of Income Tax who appeared
for the Revenue placed the case of the Revenue in detail before the Bench. He
stated that the Assessing Officer has made conclusive enquiries in a very
extensive manner to prove that the purchase and sale of shares claimed by the
assessee were only paper transactions for creating accountable money for
purchasing the flat in Colaba. The learned Commissioner submitted that it is
quite magical to believe that a small amount of money invested by the
assessee in shares of certain companies multiplied astronomically within a
very short span of time and the shares sold for a high amount as much as Rs.
1,41,08,484/-, which conveniently supported assessee’s investment in the
purchase of flat at Colaba.
9.1 The learned Commissioner submitted that the above transactions were
very incredible and that incredibility is further compounded by the fact that
the entire transactions were made outside Stock Exchange. They were all off-
market transactions. When all the above facts are read together, it is, to be
(2021) ABC 259
clearly seen that the assessee has made up a story regarding the purchase and
sale of shares so as to make out a case of non-existing capital gains.
9.2 He stated that the off-market transactions as stated by the assessee was
not proper. Radha Ashok, the Broker has confirmed in his statement before
the assessing authority that he never sold any shares to the assessee. Shri
Sandeep D. Shah, Proprietor of M/s. Rushab Investments made a similar
statement before the assessing authority. Bills of Ami Securities were forged
and unused bank bills were utilized by the assessee to give a true picture of
transactions. The broker has been expelled from the Stock Exchange much
before transactions took place. In the above circumstances, it is, to be seen
that the assessee has failed to establish the identity as well as the
creditworthiness of the brokers involved in the case.
9.3 The learned Commissioner further contended that it is clear from the
statement of Mr. Mangesh Chokshi, Proprietor of M/s. Richmond Securities
Pvt. Ltd. that assessee’s money was routed through Shri Satish Mandovara
who is a broker.
9.4 The learned Commissioner submitted that if the entire factual matrix of
the case is examined in a logical manner, it is, very clear that the assessee was
building up a story of purchase and sale of shares by making false entries in
the books of account and arranging forged documents to support such entries.
This is very clear from the statements extracted by the Assessing Officer from
the concerned parties. Statements given by those parties do really quash the
concocted story made out by the assessee.
9.5 The learned Commissioner further contended that the Assessing Officer
as well as the CIT(A) have examined the issue in a very exhaustive manner
explaining each and every instance of evidence and have passed very
speaking orders and have conclusively arrived at a finding that the amount of
Rs. 1,41,08,484/- stated to be received by the assessee on sale of shares was
only bogus and not real. He, therefore, submitted that the addition may be
confirmed in the hands of the assessee.
10. We heard both sides in detail and perused rival contentions in the light of
the records of the case and the paper book filed by the assessee. In the return
of income filed by the assessee for the year under appeal, the purchase of flat
at Colaba for a consideration of Rs. 2,06,72,904/- was reflected. The
assessee’s contribution in the purchase of the flat was @ 70 per cent for
which the investment amounted to Rs. 1,44,71,033/-. The source of
investment was, among other things, the sale proceeds of shares of Rs.
1,41,08,484/-. This amount has been questioned by the revenue authorities.
10.1 The assessee has purchased the shares of four companies viz., Allan
Industrial Gases Ltd., Mobile Telecom, Rashee Agrotech and Centil
Agrotech, during the previous years relevant to the Assessment Years 1999-
2000 and 2000-01. The books of account maintained by the assessee for both
the years clearly reflected the purchase of those shares. The shares are
reflected in the balance sheets filed by the assessee along with the returns of
income for the Assessment Years 1999-2000 and 2000-01. Therefore, it is
seen that as a prima facie evidence, the purchases of shares have been
contemporaneously entered into the books of account of the assessee.
10.2 The assessee has been declaring agricultural income in his returns of
income for the assessment years from 1990-91 to 2001-02. The total
agricultural income returned by the assessee up to the Assessment Year 1999-
2000 was at Rs. 7,57,883/-. The amount invested in the purchase of shares as
on 31.03.1999 was Rs. 4,48,160/-. The cash available with the assessee by
way of agricultural income was much higher than the investment made by the
assessee in the purchase of shares as on 31.03.1999. After making the
investments in the shares, the assessee had a surplus cash balance of Rs.
3,09,000/- as on 01.04.1999. Thereafter, the assessee has further returned an
agricultural income of Rs. 66,000 for the Assessment Year 2000-01. The
amount invested in the purchase of shares in the year ending on 31.03.2000
was Rs. 2,57,020/-. Again the assessee had a cash balance thereof of Rs.
1,18,771/-. Therefore, it is, very clear that the investment made by the
assessee in shares during the previous periods relevant to the Assessment
Years 1999-2000 and 2000-01 was supported by cash generated out of
agricultural income. The above agricultural income have been considered in
the respective assessments. Therefore, the contention of the assessing
authority that the assessee had no sufficient resourcefulness to make
investments in the shares is unfounded.
10.3 Purchase and sale of shares outside the floor of Stock Exchange is not an
unlawful activity. Off-market transactions are not illegal. It is always possible
for the parties to enter into transactions even without the help of brokers.
Therefore, it is not possible to hold that the transactions reported by the
assessee were quite sham on the legal proposition arrived at by the CIT(A)
that off-market transactions are not permissible. The assessee has stated that
the transactions were made with the help of professional mediators who are
experts in off-market transactions.
10.4 When the transactions were off-market transactions, there is no relevance
in seeking details of share transactions from Stock Exchanges. Such attempts
would be futile. Stock Exchanges cannot give details of transactions entered
into between the parties outside their floor. Therefore, the reliance placed by
the assessing authority on the communications received from the Stock
Exchanges that the particulars of share transactions entered into by the
assessee were not available in their records, is out of place. There is no
evidential value for such reliance placed by the assessing authority. The
assessee had made it very clear that the transactions were not concluded on
the floor of the Stock Exchange. The matter being so, there is no probative
value for the negative replies solicited by the assessing authority from the
respective Stock Exchanges. We are of the considered view that the materials
collected by the assessing authority from the Stock Exchanges are not valid to
dispel or disbelieve the contentions of the assessee.
(2021) ABC 261
10.5 The next set of evidences relied on by the assessing authority are the
statements obtained from various parties. When certain persons like Radha
Ashok and Sandeep D. Shah made negative statements against the assessee,
persons like Satish Mandovara and Mangesh Chokshi had given positive
statements in support of the contention of the assessee. But, the assessing
authority sought to pick and choose the statements given by various parties.
While accepting and rejecting such statements given by the parties, the
Assessing Officer has made a mistake of accepting irrelevant statements and
rejecting relevant statements. During the relevant period in which the assessee
transacted in shares, persons like Radha Ashok and Sandeep D. Shah were not
carrying on their business of brokers as in the manner they carried on the
business in the past. Even their Stock Exchange Memberships were cancelled.
It was Shri Satish Mandovara who was carrying on the business mainly for
and on behalf of Shri Mangesh Chokshi, Director of M/s. Richmond
Securities Pvt. Ltd. Those two persons have categorically admitted before the
assessing authority that they had dealings with the assessee in respect of the
share transactions. They have confirmed the transactions stated by the
assessee that he had with them. These positive statements made before the
assessing authority supported the case of the assessee. There is no force in the
action of the assessing authority in relying on the negative statements of the
other parties whose role during the relevant period was either irrelevant or
insignificant. Therefore, in the facts and circumstances of the case, it is, our
considered view that certain statements relied on by the assessing authority do
not dilute the probative value of the statements given by other persons in
favour of the assessee confirming the share transactions entered into by the
assessee.
10.6 The above circumstances have made out a clear case in support of the
book entries reflecting the purchase and sale of shares and ultimately
supporting the money received on sale of shares and finally investing the
same in the purchase of flat. The chain of transactions entered into by the
assessee have been properly accounted, documented and supported by
evidences.
10.7 Therefore, we find that the explanations of the assessee seems to have
been rejected by the assessing authority more on the ground of presumption
than on factual ground. The presumption is so compelling that comparatively
a small amount of investment made by the assessee during the previous year
period relevant to the Assessment Years 1999- 2000 and 2000-01 have grown
into a very sizable amount ultimately yielding a fabulous sum of Rs.
1,41,08,484/- which was used by the assessee for the purchase of the flat at
Colaba. The sequence of the events and ultimate realization of money is quite
amazing. That itself is a provocation for the Assessing Officer to jump into a
conclusion that the transactions were bogus. But, whatever it may be, an
assessment has to be completed on the basis of records and materials available
before the assessing authority. Personal knowledge and excitement on events,
should not lead the Assessing Officer to a state of affairs where salient
evidences are over-looked. In the present case, howsoever unbelievable it
might be, every transaction of the assessee has been accounted, documented
and supported. Even the evidences collected from the concerned parties have
been ultimately turned in favour of the assessee. Therefore, it is, very difficult
to brush aside the contentions of the assessee that he had purchased shares and
he had sold shares and ultimately he had purchased a flat utilizing the sale
proceeds of those shares.
10.8 For a moment, even if all the above evidences are ignored, one cannot
overlook the pressure of the evidence coming out of the survey carried out by
the department in the business premises of the assessee. There was a survey
carried out by the department in the business premises of the assessee. In the
course of survey, contract notes for sale of shares, copies of bills thereof,
photocopies of share certificates etc., were found. The purchase and sale of
shares were also found recorded in the books of account. The department has
no case that the survey was a staged enactment. A survey is always
unexpected. So, it is not possible to presume that the assessee had collected
certain fabricated documents and kept at his business premises so as to
hoodwink the survey party to lead them to believe that the assessee had
entered into share transactions. Atleast such an inference is not possible in
law. The department has no defence against the forcible argument of the
learned counsel that the survey conducted by the department has out and out
upheld the contention of the assessee that he had purchased and sold shares.
We find that this solitary evidence collected in the course of survey is
sufficient to endorse the bona fides of the share transactions made by the
assessee.
10.9 Therefore, in short on the basis of the internal evidences available with
the assessee and the fact that the sale proceeds were collected through bank
accounts and coupled with the external evidence of survey and statement of
parties, we have to hold that the sale proceeds of Rs. 1,41,08,484/- has been
explained. Therefore, the said addition is deleted.
11. As we have held that the sum of Rs. 1,41,08,484/- has been explained by
the assessee, the assessee is entitled for the benefit of Section 54E against the
purchase of flat at Colaba, in accordance with law. The assessing authority is,
therefore, directed to grant the benefit of Section 54E to the assessee.
12. Next we will consider the addition of Rs. 6,61,063/-. The case of the
assessee was that the amount represented the realization of loan out-standing
with M/s. Rainbow Industries. As per the ledger copy of account of M/s.
Rushab Investments (Page 159 of the paper book), there was an opening
balance as on 01.04.2000 amounting to Rs. 6,61,063.43. There are also
payment entries by cheques for Rs. 1,61,063.43 and Rs. 5 lakhs. This
statement of account has been confirmed by the Proprietor of M/s. Rushab
Industries. He has also furnished his assessment particulars before the
assessing authority. Therefore, in such circumstances, without any further
enquiries and collection of evidence, it is not possible for the assessing
(2021) ABC 263
authority to come to a finding against the assessee. The assessee has explained
the availability of cash necessary for making bank deposits with the help of
his accounts and account of copies of the other party along with his
confirmation. In these circumstances, we find that the addition of Rs.
6,61,063.43 is not justified. Therefore, it is, deleted.
13. The last point is regarding the addition of Rs. 2 lakhs. The assessee has
furnished the details of the remittance of the said amount by Shri Ravindra
Kumar Tailor who is in New Zealand. He is the co-brother of the assessee. He
had issued cheque No. 251788 dated 13.03.2001 drawn on his NRE Account
27622 with Bank of India, Mumbai Central Branch. When the remittance of
money is supported by banking documents, there is no reason to disbelieve
the version of the assessee and make an addition thereto. It is not justified.
This addition is also therefore deleted.
14. In result, the appeal filed by the assessee is allowed.
_____________
(2016) 2 ITJ Online 928 (All)
In the High Court of Allahabad
Jagdish Kumar Gulati
v.
Shri M. Katju and Shri R.S. Tripathi, JJ.
ITA No. 17 of 2003
23rd April, 2004
Revisional Jurisdiction Exercised by Commissioner U/s. 263 of Income Tax
Act,1961-Scrutiny Assessment U/s. 143(3) of Income Tax Act,1961 carried
out by the Assessing Officer-Appeal Against the Order of Commissioner U/s.
260A of Income Tax Act,1961-That the Assessing Officer had completed the
assessment in undue haste and to save the assessment proceedings from
becoming time barred and the Assessing Officer could not do the required
investigations in the case of the assessee. Hence the CIT was of the opinion
that the order of the Assessing Officer was pre-judicial to the interest of the
revenue. The CIT therefore set aside the assessment order dated 09.03.2001
and directed the Assessing Officer to make a fresh assessment after
ascertaining the fair valuation of the property let out by the assessee to the
sister concern and also ascertaining the cost of construction of the property at
Minhajpur, Allahabad-Held-On the facts of the case we do not find any error
of law in the order of the Tribunal. It is evident from the facts that the
Assessing Officer did not properly try to find the fair rent of the property let
out to the sister concern or the investment made in the Minhajpur, Allahabad
property. The assessment order is very brief and does not show any detailed
enquiry made by the Assessing Officer. It is evident that the Assessing Officer
did not try to investigate the details furnished by the assessee.
-When an assessment is done under Section 143(3) of the Act it is expected

that the Assessing Officer will make a detailed enquiry to find out the correct
income of the assessee and not take the facts placed by the assessee on their
face value. No proper enquiry appears to have been made by the Assessing
Officer in this case. The case was taken up for hearing in March, 2001 after
the first hearing in November, 1999. In fact it has been admitted by the
Assessing Officer that he could not make proper enquiries as the assessment
was becoming time barred.
-It is well settled that if the Assessing Officer fails to make a proper enquiry
this is erroneous and pre-judicial to the interest of the revenue.
-The Commissioner after taking into consideration the assessment order and
material on record came to the conclusion that the order of the Assessing
Officer is erroneous inasmuch as it is prejudicial to the interest of revenue.
Hence there was valid assumption of jurisdiction under Section 263 of the Act
by the Commissioner and the Tribunal has not committed any error of law in
confirming the order of the CIT in setting aside the assessment order under
Section 263 and directing the Assessing Officer to make fresh assessment for
the Assessment Year 1998-99 after ascertaining the fair rental values of the
properties let out by the assessee to his sister concerns and after ascertaining
the cost of construction in respect of the property situated at Minhajpur,
Allahabad.

Relevant Provisions : S.263 of Income Tax Act,1961.
Addl. CIT v. Mukur Corpn., (2016) 2 ITJ Online 758 (Guj) : (1978) 111 ITR
312 [Refer Para 13]
Bagsu Devi Bafna v. CIT, (1967) 63 ITR 333 (Cal.) [Refer Para 13]
CIT v. Active Traders, (2016) 2 ITJ Online 765 (Cal) : (1995) 214 ITR 583 :
(1993) 115 CTR 69 : (1993) 69 Taxman 281 [Refer Para 13]
CIT v. Christian Mica Industries Ltd., (1979) 120 ITR 627(Cal) [Refer Para
16]
CIT v. Everest Cold Storage, (1996) 220 ITR 241 (MP) [Refer Para 13]
CIT v. Kiran Debi Singhee, (1967) 65 ITR 501 (Cal.) [Refer Para 13]
CIT v. Mahavar Traders, (2016) 2 ITJ Online 72 (MP) : (2007) 7 ITJ 637 :
(1996) 220 ITR 167 [Refer Para 13]
CIT v. Rampiyari Khemka, (1967) 63 ITR 367 (Cal.) [Refer Para 13]
CIT v. Shree Manjunathesware Packing Products & Camphor Works, (2016)
1 ITJ Online 923 (SC) : (1998) 231 ITR 53 : (1997) 143 CTR 406 : (1998)
(2021) ABC 265
96 Taxman 1 [Refer Para 17]
Duggal & Co. v. CIT, (2016) 2 ITJ Online 777 (Delhi) : (1996) 220 ITR
Gee Vee Enterprises v. Addl. CIT, (2016) 2 ITJ Online 778 (Delhi) : (1975)
99 ITR 375 [Refer Para 13]
K.A. Ramaswamy Chettiar v. CIT, (1996) 220 ITR 657 (Mad.) [Refer Para
13]
[Refer Para 13]
Swarup Vegetable Products Industries Ltd. No. 1 v. CIT, (1991) 187 ITR
412 (All.) [Refer Para 13]
Equivalent Citation : (2004) 269 ITR 71 (Allahabad) : (2004) 191 CTR
25 (Allahabad) : (2004) 139 Taxman 369 (Allahabad)
JUDGMENT
Shri Shri M. Katju, J. :
1. This appeal under Section 260A of the Income Tax Act has been filed
against the judgment of the Income Tax Appellate Tribunal, Allahabad dated
18.10.2002 relating to Assessment Year 1998-99.
2. Heard learned counsel for the parties.
3. The appellant owns properties at 199, Transport Nagar, Kanpur and 24,
Chak Road, Allahabad jointly with his two brothers Sri Girdhar Gopal Gulati
and Sri Sat Pal Gulati. The appellant has 1/3rd share in the said properties.
4. In the Year 1993 the appellant and his brothers started construction of a
building in a plot situate at 2/1/3, Minhajpur, Allahabad. The said
construction was completed in the Year 1997. In January 1998 this building
was let out to a society known as Shivram Das Memorial Society on rent for
running an educational institution. On the basis of the rent received by the
assessee the income from the property was disclosed by the three brothers.
5. The Assessing Officer completed assessment under Section 143(3) of the
Act for the Assessment Year 1998-99 on 09.03.2001. The Commissioner of
Income Tax set aside the afore said assessment order under Section 263
holding that the assessment order dated 09.03.2001 is pre-judicial to the
interest of the revenue on the following grounds –
(i) Reasons for the selection of the case under scrutiny was to investigate
the correct income from house property and to investigate the loss
brought forward from the earlier year. To investigate the investment
in the construction of the house property was also an issue for
bringing the case under scrutiny. However, the assessment order in
question reveals that the Assessing Officer has investigated none of
the issues.
(ii) The assessment has been made in a very routine manner and no
certificate with reference to the rental income disclosed with that of
the fair market value of the properties let out could be made.
(iii) Investment in the construction of the property could not be
investigated as no enquiry regarding investment has been made by
the Assessing Officer himself or by sending his Inspector at the
spot.
(iv) Income from other sources has also not been investigated by the
Assessing Officer.
In coming to his conclusion the CIT was of the view that the only papers filed
by the assessee during the course of the assessment proceedings were :–
(i) Details of drawings for household expenses;
(ii) Extract from the minutes of meetings of SRDC Memorial Society
held on 15.09.1997 at 2.00 p.m.; and
(iii) Copy of approved valuer’s report.
6. The CIT also considered the note written by the Assessing Officer in
which it was mentioned that due to lack of time the fair rent of the property at
199, Transport Nagar, Kanpur and 24, Chak Road, Allahabad could not be
ascertained. In this note the Assessing Officer mentioned that the assessee is
showing the rent of Rs. 1250 in respect of the property at 199, Transport
Nagar, Kanpur. The assessee was paying municipal tax Rs. 10412 on the
property at 24, Chak Road, Allahabad but he is showing the rent of Rs. 150.
The Assessing Officer also mentioned that the assessee had shown 1/3rd share
in the income of the property but there is no deed to show the assessee’s
share. The CIT also considered that the Assessing Officer has deputed an
Inspector for making an enquiry and the Inspector submitted his report on
23.07.2001, which was placed on record. The Inspector estimated the
investment in this property at Rs. 1.5 crores as against Rs. 75,30,763/-
disclosed by the assessee. The Inspector also reported that the property at,
199, Transport Nagar, Kanpur had been let out to a sister concern M/s. U.P.
Transport Agency for monthly rent of Rs. 1250. This property covers an area
of about 4000 sq. ft. and is situate at the market place. Hence the Inspector
estimated the rental at Rs. 5,000/- per month. The Inspector also reported that
the property situate at 24, Chak Road, Allahabad consists of about 20 rooms
and this property has also been let out to a sister concern M/s. United Auto
Mobile at monthly rent of Rs. 150.
7. The CIT hence concluded that the Assessing Officer had completed the
assessment in undue haste and to save the assessment proceedings from
becoming time barred and the Assessing Officer could not do the required
investigations in the case of the assessee. Hence the CIT was of the opinion
that the order of the Assessing Officer was pre-judicial to the interest of the
revenue. The CIT therefore set aside the assessment order dated 09.03.2001
and directed the Assessing Officer to make a fresh assessment after
(2021) ABC 267
ascertaining the fair valuation of the property let out by the assessee to the
sister concern and also ascertaining the cost of construction of the property at
Minhajpur, Allahabad.
8. Against this order an appeal was filed before the Tribunal which has been
dismissed and hence this appeal.
9. Learned Counsel for the appellant submitted that all details regarding the
income from the property were furnished before the Assessing Officer and
these details show computation of the income furnished by the assessee along
with the return. A valuation report was also furnished before Assessing
Officer. It is alleged that the assessment was not done in undue haste. It is
alleged that the CIT considered the office note written by the Assessing
Officer but there is no law which permits the Assessing Officer to make a
note after the assessment order is passed, and the note cannot be made the
basis for action under Section 263.
10. We cannot agree with the submissions of the learned counsel for the
appellant. The case of the assessee was selected for scrutiny and the Assessing
Officer was expected to make investigation in detail. As observed in
paragraph 8 of the Tribunal’s order, the first hearing in the case was fixed on
02.11.1999 and there was no hearing thereafter for more than one year. On
02.11.1999 certain details were asked for and the Assessing Officer fixed the
case for hearing on 25.11.1999. However, there was no hearing at all till
07.03.2001 and the Assessing Officer passed the order on 09.03.2001 as the
Assessing Officer was under the impression that the case was becoming time
barred.
11. On the facts of the case we do not find any error of law in the order of the
Tribunal. It is evident from the facts that the Assessing Officer did not
properly try to find the fair rent of the property let out to the sister concern or
the investment made in the Minhajpur, Allahabad property. The assessment
order is very brief and does not show any detailed enquiry made by the
Assessing Officer. It is evident that the Assessing Officer did not try to
investigate the details furnished by the assessee.
12. When an assessment is done under Section 143(3) of the Act it is
expected that the Assessing Officer will make a detailed enquiry to find out
the correct income of the assessee and not take the facts placed by the
assessee on their face value. No proper enquiry appears to have been made by
the Assessing Officer in this case. The case was taken up for hearing in
March, 2001 after the first hearing in November, 1999. In fact it has been
admitted by the Assessing Officer that he could not make proper enquiries as
the assessment was becoming time barred.
13. It is well settled that if the Assessing Officer fails to make a proper
enquiry this is erroneous and pre-judicial to the interest of the
revenue vide K.A. Ramaswamy Chettiar v. CIT, (1996) 220 ITR
657 (Mad.); Addl. CIT v. Mukur Corpn., (2016) 2 ITJ Online 758 (Guj) :
(1978) 111 ITR 312; Gee Vee Enterprises v. Addl. CIT, (2016) 2 ITJ Online
778 (Delhi) : (1975) 99 ITR 375; Malabar Industrial Co. Ltd. v. CIT, (2018) 5
ITJ Online 298 (SC) : (2016) 28 ITJ 133 : (2000) 243 ITR 83 : (2000) 159
CTR 1 : (2000) 109 Taxman 66 CIT v. Active Traders, (2016) 2 ITJ Online
765 (Cal) : (1995) 214 ITR 583 : (1993) 115 CTR 69 : (1993) 69 Taxman
281; Swarup Vegetable Products Industries Ltd. No. 1 v. CIT, (1991) 187 ITR
412 (All.); CIT v. Rampiyari Khemka, (1967) 63 ITR 367 (Cal.); Bagsu
Devi Bafna v. CIT, (1967) 63 ITR 333 (Cal.); CIT v. Kiran Debi
Singhee, (1967) 65 ITR 501 (Cal.); CIT v. Mahavar Traders, (2016) 2 ITJ
Online 72 (MP) : (2007) 7 ITJ 637 : (1996) 220 ITR 167; CIT v. Everest Cold
Storage, (1996) 220 ITR 241 (MP) and Duggal & Co. v. CIT, (2016) 2 ITJ
Online 777 (Delhi) : (1996) 220 ITR 456 : (1994) 122 CTR 171 : (1994) 77
Taxman 331.
14. Learned Counsel for the appellant has stated that the Assessing Officer
made all necessary enquiries. We cannot agree with this submission. The
Assessing Officer had himself stated that he could not make the relevant
enquiries, as the assessment was becoming time barred. There is no reason to
disbelief this note of the Assessing Officer.
15. In paragraph 11 of the order of the Tribunal the full details have been
given and we are satisfied on perusing the same that the Assessing Officer did
not made the proper enquiries as he was expected to do as he has himself
admitted. As regard the appellant, contention that the Assessing Officer
cannot make an office note after passing an assessment order because there is
no provision for doing so we cannot accept this submission. The office note
indicates that proper enquiries were not made by the Assessing Officer as he
himself admits. There is no statutory bar in making an office note. There is
also no statutory bar in relying on the office note under Section 263 by the
office note. The Assessing Officer has expressed his opinion that he was not
able to make proper enquiries. When the Assessing Officer has himself made
this admission it is not for the appellant to dispute it. Moreover, the report of
the Inspector indicates that the assessee has not given the correct details about
the valuation and income of the properties in question as stated in paragraph
12 of the impugned order of the Tribunal.
16. CIT v. Christian Mica Industries Ltd., (1979) 120 ITR 627 (Cal) the
Calcutta High Court held that the power of the Commissioner is not confined
to assessment orders by the ITO. It extends to all order passed by the ITO.
It must be remembered that this Court can only see errors of law in the orders
of the Tribunal under Section 260A but it cannot go into factual controversies.
The question whether proper enquiries were made or not is a factual question
and there is material to support this finding of fact as is evident from
paragraphs 11 and 12 of the Tribunal orders. Hence this Court cannot interfere
under Section 260A of the Income Tax Act.
17. In CIT v. Shree Manjunathesware Packing Products & Camphor
Works, (2016) 1 ITJ Online 923 (SC) : (1998) 231 ITR 53 : (1997) 143 CTR
406 : (1998) 96 Taxman 1 the Supreme Court has held that the word “Record”
(2021) ABC 269
in the explanation to Section 263(1) includes all the records relating to the
proceedings under the Act available at the time of examination by the
Commissioner and is not confined to the material available to the Income Tax
Officer. Thus, the revisional power of the Commissioner under Section 263 is
of wide amplitude. It enables the CIT to call for and examine the record of
any proceedings under the Act. It empowers the CIT to make or cause to be
made such inquiry as he deems necessary in order to find out if any order
passed by the Assessing Officer is erroneous in so far as it is prejudicial to the
interest of the revenue. After examining the records and after making or
causing to be made an inquiry if he considers the order to be erroneous then
he can pass the order thereon as the circumstances of the case
justify i.e. enhancing the assessment or he may modify the assessment, cancel
the assessment and direct a fresh assessment. In this way the Commissioner’s
order cannot be faulted because he cancelled the assessment and directed a
fresh assessment.
18. The Supreme Court in the case of Malabar Industrial Co. Ltd., (supra)
defines the words “erroneous and prejudicial to the revenue” as follows :–
“...An incorrect assumption of acts or an incorrect application of law will
satisfy the requirement of the order being erroneous. In the same
category are all orders passed without applying the principles of natural
justice or without application of mind. The phrase ‘prejudicial to the
interest of the revenue’ is not an expression of art and is not defined in
the Act. Understood in its ordinary meaning it is of wide import and is
not confined to loss of tax. The scheme of the Act is to levy and collect
tax in accordance with the provisions of the Act and this task is entrusted
to the revenue. If due to an erroneous order of the Assessing Officer, the
revenue is loosing tax lawfully payable by a person, it will certainly be
prejudicial to the interest of the revenue.” (p. 83)
19. In the present case it prima facie appears that the appellant has not made
correct disclosure. He has shown the rent of the property at 24, Chak Road,
Allahabad at only Rs. 150 per month, which is prima facie unbelievable in
these days when rents are soaring for a property which has 20 rooms as found
by the Inspector. He has also shown rent of Rs. 1250 per month for the
property at 199, Transport Nagar, Kanpur which is difficult to believe
considering that the property covers an area of about 4000 sq.ft. and as in a
market place.
20. Thus in the present case the Commissioner after taking into consideration
the assessment order and material on record came to the conclusion that the
order of the Assessing Officer is erroneous inasmuch as it is prejudicial to the
interest of revenue. Hence there was valid assumption of jurisdiction under
Section 263 of the Act by the Commissioner and the Tribunal has not
committed any error of law in confirming the order of the CIT in setting aside
the assessment order under Section 263 and directing the Assessing Officer to
make fresh assessment for the Assessment Year 1998-99 after ascertaining the
fair rental values of the properties let out by the assessee to his sister concerns
and after ascertaining the cost of construction in respect of the property
situated at Minhajpur, Allahabad.
For the reasons given above we find no merits in this appeal and it is
dismissed.
21. Before parting with this case we would like to mention that it is often
found that assessment are being done in an improper manner without proper
enquiries and the explanation given is that it was done in a hurry as limitation
was expiring. This is often a pretext for not doing a proper assessment, and it
raises apprehensions that the Assessing Officer is hand in glove with the
assessee. It is the practice of the department not to scrutinize every case in
detail, but when a case is picked up for scrutiny surely the duty of the
Assessing Officer is to do thorough investigation but he did not do it in this
case, which is indeed lamentable. We are therefore, of the opinion that the
C.B.D.T. should issue appropriate circulars to the Income Tax authorities that
at least in scrutiny cases there should be thorough enquiries by the Assessing
Officer, and in such cases his functioning should be monitored by a superior
officer. The plea that he did not have time and that he was making a hurried
assessment as the assessment was becoming time barred should not be
accepted in such cases.
___________

Dipesh Ramesh Vardhan and Others
v.
Deputy Commissioner of Income Tax
Shri Mahavir Singh, VP and Shri Manoj Kumar Aggarwal, AM
ITA Nos. 7648, 7662, 7651, 7650, 7649/Mum/2019
11th August, 2020
Cash Credits-S.68 of Income Tax
Act,1961-Addition-Unaccounted/Unexplained Income-Original Assessment
U/s. 143(3) of Income Tax Act,1961-Assessing Officer made Addition as
Unaccounted/Unexplained Income of Rs. 2,99,76,550/- by treating the Long
Term Capital Gain as Manipulated Transaction and further adding 2% thereon
as commission by just relying upon third party statement without establishing
any connection of the appellant with the said third party and completely
disregarding the direct documentary evidences submitted by the Appellant
and even no incriminating documents/materials were found during the course
of Search Action/Proceedings-the assessee being resident individual is stated
to be director and partner in the Vardhman Group of Companies and firms
(2021) ABC 271
which carries on the business as Builders & Developers, granting of loans &
advances and investment activities. The assessee earned Salary income in the
form of director’s remuneration from group companies and interest income on
loans during the year which has duly been reflected in the return of income.
The assessee also earned exempt income in the form of Long-Term Capital
Gains (LTCG), Share of profit from partnership firms, interest on PPF &
dividends etc. The sole subject matter of the appeal is certain addition on
account of Long-Term Capital Gains earned by the assessee during the year.
The assessee reflected LTCG of Rs. 293.88 Lacs on certain shares
transactions which were claimed to be exempt u/s. 10(38). The Ld. AO as
well as Ld. first appellate authority has denied the same and hence, this
appeal.
-The record would show that an assessment was framed for year under
consideration u/s. 143(3) r.w.s. 153A of the Act on 21.12.2016 wherein the
income of the assessee was determined at Rs. 303.50 Lacs after certain
additions of unexplained income as against returned income of Rs. 3.74 Lacs
filed by the assessee on 25.09.2014. The LTCG earned by the assessee was
treated as its unaccounted income and Ld. AO had estimated commission
income against these transactions @ 2%.The said assessment stem from
search operations u/s. 132 as carried out by the department at various
residential and business premises of assessee group on 05.11.2014. During the
course of search at the residence of the assessee, excess jewellery worth Rs.
3.30 lacs was found which was offered to tax in statement u/s. 132(4).
Consequently, notices u/s. 153A & 143(2) were issued as per due process of
law.
-That various family members of the group reflected LTCG aggregating in all
to Rs. 3235.98 Lacs and claimed the same to be exempt u/s. 10(38). The
assessee-wise detail, in this respect has been tabulated in para 4.1 of the
quantum assessment order. Accordingly, the assessee was asked to explain the
genuineness of the aforesaid LTCG. The amount of LTCG reflected by the
assessee was Rs. 293.88 Lacs.
-That the assessee made investment in the shape of 62,500 Equity Shares of
an entity namely Santoshima Tradelink Ltd. (STL) during the month of
September, 2011. The face value of the share was Rs.10/- per share with
premium of Rs. 10/- per share and accordingly, the assessee paid a sum of Rs.
12.50 Lacs to acquire the same. The shares were duly allotted in due course
and the shares certificates were received in physical form and the shares were
ultimately dematerialized in assessee’s account during March, 2012.
-M/s STL got amalgamated with another entity namely M/s Sunrise Asian
Ltd. (SAL) pursuant to a scheme of amalgamation u/s. 391 to 394 which was
duly approved by Hon’ble Bombay High Court. As per the scheme of
amalgamation, share swap ratio was fixed as 1:1 and accordingly, the shares
of STL were swapped with the shares of SAL which were credited in
assessee’s demat account during the month of June, 2013. M/s SAL was a
public limited company and its shares were listed on Bombay Stock Exchange
as Group ‘A’ shares signifying that the shares were highly traded having
highest degree of liquidity.
-The assessee sold these shares through online platform (BOLT) provided by
recognized stock exchange and delivered the shares in demat form to the
clearing house and received sale consideration through its stock-broker in the
month of March, 2014. The sale consideration was received through banking
channels. Since the investment was held for more than 1 year and the sale
transactions were undertaken through recognised stock exchange on which
Securities Transactions Tax (STT) was paid, the assessee apparently fulfilled
the conditions laid down in Section 10(38) and accordingly claimed
exemption of the gain. The LTCG earned on these transactions was worked
out to be Rs. 293.88 Lacs.
-Summons u/s. 131 were issued at the address of M/s SAL which remained
un-responded to. It transpired that a search action was conducted at various
places of one Shri Vipul Bhat on 05.02.2016 wherein it was revealed that Shri
Vipul Bhat was controlling M/s SAL and was engaged in rigging the share
price of M/s SAL. Based on outcome of search proceedings, an opinion was
formed that M/s SAL was merely a paper company engaged in providing
accommodation entries to various beneficiaries. This search was subsequent
to search conducted on the assessee on 05.11.2014. In the said background,
the transactions carried out by the assessee was subjected to scrutiny during
assessment proceedings.
-The assessee furnished copies of purchase and sales contract notes. The
copies of financial statements of M/s STL for F.Ys. 2009-10 & 2010-11, on
the basis of which the decision to make the investment was taken by the
assessee, was also placed on record. The assessee also submitted month-wise
data of trading volume and price range of shares of M/s SAL for more than 2
years i.e. from the month of Jan 2013 to July 2015. During the aforesaid
period, the price range was continuously shown to be in the range of Rs. 360-
600 per share and the trading volumes were shown to be in the range of 5
Lacs to 25 Lacs shares per month. The price range was stated to be in the
same range for 15 months after the period of sale of shares by the assessee.
Therefore, the allegations of rigging or manipulation of shares were refuted.
The assessee denied having known Shri Vipul Bhat and submitted that it had
no privy of contract with the buyers of the shares since the shares were sold
through recognised stock exchange in online mode. In the above background,
the assessee denied the allegations of Ld. AO qua rigging / manipulation of
share prices of M/s SAL.
-That there was survey action u/s. 133A on 04.02.2016 in case of M/s SAL.
During survey, the statement of Shri Kalpesh Manahar Jani (Director of M/s
SAL) was recorded wherein the said person denied having any link with M/s
SAL but submitted that Shri Vipul Bhat appointed him as a director of M/s
SAL. The survey on the premises of M/s SAL revealed that given address was
(2021) ABC 273
dummy office and it was a paper company.

It was also noted that various entities controlled by Shri Vipul Bhat acted as
exit providers to the beneficiaries of the scrips. Two of these entities were M/s
Sampada Chemicals Ltd. & M/s Shipra Fabrics Pvt. Ltd.
The director of M/s Sampada Chemicals Ltd. namely Shri Kaushik Balubhai
Madhwani, during survey proceeding, denied having any link with entity M/s
Sampada Chemicals Ltd. Similarly, the director of M/s Shipra Fabrics Pvt.
Ltd. denied having any knowledge about the said entity and submitted that
this entity was being operated by Shri Vipul Vidur Bhatt.
Shri Vipul Vidur Bhat accepted under oath that he was involved in providing
accommodation entries against commission. He admitted to have manipulated
the share prices of M/s SAL for providing accommodation entries of LTCG.
-The survey action led to issuance of search warrant u/s. 132 on 05.02.2016 in
the name of Shri Vipul Vidur Bhat and his various entities including M/s
SAL. During search operations, statement of Shri Vipul Vidur Bhat was
recorded u/s. 132(4) wherein he admitted to have indulged in providing
accommodation entries to beneficiaries against commission.
-To verify the genuineness of the transactions of various assessee of Vardhan
Group, trading data was collected from Stock Exchange. The details of buyer
who purchased the shares of Vardhan Group were tabulated in para 4.5 of the
quantum assessment order. From the said analysis, a conclusion was drawn
that the shares were purchased by various concerns of Shri Vipul Bhat only. It
was also noted that there was circular trading within the group entities of Shri
Vipul Bhat which helped in manipulating the prices of M/s SAL.
-The principle of human probability in terms of decision of Hon’ble Supreme
Court in Sumati Dayal v. CIT, (2016) 1 ITJ Online 794 (SC) : (1995) 214 ITR
801 : (1995) 125 CTR 124 : (1995) 80 Taxman 89, these transactions were
termed as manipulated transaction done by the assessee in connivance with
Shri Vipul Bhat to evade the taxes on unaccounted income. In order to obtain
such transactions, a commission would usually be paid. The same was
estimated @ 2%. The action of Ld. AO resulted into an addition of Rs. 299.76
Lacs in the hands of the assessee.
-The quantum assessment order, it was noted that the search was conducted
on the assessee on 05.11.2014. The return of income for A.Y. 2014-15 was
already filed by that date. However, the time limit for issuance of notice u/s.
143(2) had not expired. As a matter of fact, the return of income for A.Y.
2014-15 was selected for scrutiny through CASS for the purpose of
examination of exempt LTCG. Therefore, the assessee’s contention that there
was no incriminating material found during the course of search operations
and therefore no addition based on material other than incriminating material
would be justified, could not be accepted. Accordingly, the assessment was
framed against the assessee.
-Held-
-The perusal of record would reveal that the assessee purchased certain shares
of an entity namely M/s STL as early as September, 2011. The shares were
converted into demat form in assessee’s account during the month of March,
2012. The transactions took place through banking channels. The investments
were duly reflected by the assessee in financial statements of respective years.
The copies of financial statements of M/s STL for F.Ys. 2009-10 & 2010-11
which led to investment by the assessee in that entity was also furnished
during the course of assessment proceedings. Subsequently, M/s STL got
merged with another entity viz. M/s SAL pursuant to scheme of amalgamation
u/s. 391 to 394 of The Companies Act, 1956. The Scheme was duly approved
by Hon’ble Bombay High Court vide order dated 22.03.2013, a copy of which
is on record. Consequently, the shares of M/s STL held by the assessee got
swapped with the shares of M/s SAL and new shares were allotted to the
assessee during June, 2013 pursuant to the approved scheme of
amalgamation. M/s SAL is stated to be listed public company Group ‘A’
shares signifying high trades with high liquidity. The assessee has sold these
shares through its stock broker namely M/s Unique Stockbro Private Limited
in online platform of the recognised stock exchange during the month of
March, 2014. The selling price was in the range of Rs. 489/- to Rs. 491/- per
share. The transactions took place through online mechanism after complying
with all the formalities and procedure including payment of STT. The
delivery of the shares was through clearing mechanism of the stock exchange
and sale consideration was received through banking channels. The
transactions are duly evidenced by contract notes, demat statements, bank
statements and other documentary evidences. The key person of assessee
group, in his statement, maintained the position that trading transactions were
genuine transactions carried out through stock exchange following all process
and legal procedures. The assessee also filed trading volume data and price
range of the scrip for a period of more than 2 years i.e. from Jan, 2013 to July,
2015. The shares reflected healthy trading volume and the price range
reflected therein was in the range of Rs. 360/- to Rs. 600/- per share. The
price range was stated to be in the same range for 15 months after the period
of sale of shares by the assessee, which has not been disputed by the revenue.
On the basis of all these facts, it could be gathered that the assessee had duly
discharged the onus casted upon him to prove the genuineness of the stated
transactions and the onus had shifted on revenue to rebut the same.
-Therefore, considering the entirety of facts and circumstances, we are not
inclined to accept the stand of Ld. CIT(A) in sustaining the impugned
additions in the hands of the assessee. Resultantly, the addition on account of
alleged Long-Term Capital Gains as well as estimated commission against the
same, stands deleted. The grounds of appeal, to that extent, stand allowed.
-The grounds relating to levy of interest as well as initiation of penalty, being
consequential in nature, would not require any specific adjudication on our
part. Finally, the appeal stands partly allowed in terms of our above order.
(2021) ABC 275
ITA No. 7649, 7650, 7651, 7662 / Mum/2019 for A.Y. 2014-15:
-It is an admitted position that facts are pari-materia the same in all these
appeals. The assessment was framed in the hands of various assessee, in
similar manner, wherein Long-Term Capital Gains earned by all the four
assessee were treated as unexplained income and added to their income with
further addition of estimated commission income of 2%. The impugned orders
are on similar lines. The assessee is before us with identical grounds of
appeal. Therefore, our findings, conclusion as well as adjudication as for ITA
No. 7648/Mum/2019 shall mutatis- mutandis apply to all these appeals as well
Final outcome – Partly Allowed.

Relevant Provisions : S.68, S.133, 132,10(38), 143 of Income Tax Act,1961
Andaman Timber Industries v. CCE, (2019) 7 ITJ Online 245 (SC) [Refer
Para 4.3, 7]
Anraj Hiralal Shah (HUF) v. ITO (ITA No. 4514/Mum/2018 dated
16.07.2019) [Refer Para 12]
CIT v. Shyam S. Pawar, (2019) 7 ITJ Online 241 (Bombay) : (2015) 229
Taxman 256 : (2015) 54 Taxmann.com 108 [Refer Para 12]
Kishanchand Chellaram v. CIT, (2018) 5 ITJ Online 287 (SC) : (2016) 28
[Refer Para 4.3]
Mukesh R. Marolia v. Addl. CIT, (2006) 6 SOT 247 (Trib.-Mum.) [Refer
Para 12]
Omar Salay Mohamed Sait v. CIT, (1959) 37 ITR 151(SC) [Refer Para 7]
Sumati Dayal v. CIT, (2016) 1 ITJ Online 794 (SC) : (1995) 214 ITR 801 :
(1995) 125 CTR 124 : (1995) 80 Taxman 89 [Refer Para 3.13]
Umacharan Shaw & Bros. v. CIT, (1959) 37 ITR 271 (SC) [Refer Para 7]
Counsel :
– Vimal Punamiya – Ld. AR, for the Assessee;
– Jayant Jhaveri – Ld. CIT – DR and Shri Udool Raj Singh – Ld. Sr. DR, for
the Revenue.
ORDER
Shri Manoj Kumar Aggarwal, AM :
1. Aforesaid appeals by 5 different assessee contest separate orders of learned
first appellate authority. Since the issues were identical and stem from same
set of facts, the appeals were heard together and are now being disposed-off
by way of this consolidated order for the sake of convenience and brevity. It is
admitted position that adjudication in any of the appeals would equally apply
to all the other appeals also.
2. We have carefully heard the arguments advanced by both the
representatives during the course of hearing as well as during clarification.
We have perused relevant material on record including the documents placed
in the paper-book. We have also deliberated on various judicial
pronouncements as cited by both the representatives during the course of
hearing. The written submissions have duly been considered. Our adjudication
to the captioned appeals would be as given in succeeding paragraphs. ITA No.
7648/Mum/2019 of Shri Dipesh Ramesh Vardhan is taken as the lead case.
ITA No.7648/Mum/2019 for A.Y. 2014-15: Shri Dipesh Ramesh Vardhan
3.1 This appeal assails the the order of Ld. Commissioner of Income Tax
(Appeals)-48, Mumbai, (in short referred to as ‘CIT(A)’), dated 31.10.2019
on following grounds of appeal.
(1) Addition as Unaccounted/Unexplained Income of Rs. 2,99,76,550/- by
treating the Long Term Capital Gain as Manipulated Transaction and further
adding 2% thereon as commission by just relying upon third party statement
without establishing any connection of the appellant with the said third party
and completely disregarding the direct documentary evidences submitted by
the Appellant and even no incriminating documents/materials were found
during the course of Search Action/Proceedings.
(a) On the facts and the circumstances of the case and in law, the learned
Assessing Officer has erred in law and facts in treating the Long-Term
Capital Gain as Manipulated Transactions and further adding 2% thereon
as commission expenses and added an amount of Rs. 2,99,76,550/- to
total income under Section 68 of the Income Tax Act 1961 even though
no incriminating documents and/or material of alleged cash paid to the
alleged accommodation entry provider/share operator were found during
the course of search action/proceedings. The learned Assessing Officer
has just acted mechanically relying upon third party statement and
reference made by the Investigation Wing without taking cognizance of
and completely disregarding the direct documentary evidences submitted
by the Appellant during the assessment proceeding pertaining which
were sufficient enough to establish the genuineness of the transactions.
The learned Assessing Officer has erred in relying upon the irrelevant
material seized in the case of some person named as Mr. Vipul Bhatt and
his statement with whom the Appellant has no connection whatsoever
and the learned Assessing Officer did not establish any connection of the
appellant with the said Mr. Vipul Bhatt. The learned Assessing Officer
rejected the claim of the Appellant just because the Appellant did not
produce the party i.e. the Company without appreciating that the
Appellant is not obliged under any law to produce any of the Company
as the shares were sold at the online platform of the stock exchange and
not to the company.
(2021) ABC 277
(b) The learned CIT (Appeal) has erred in upholding the action of the AO in
making addition of Rs. 2,99,76,550/- under Section 68 of the Income Tax
Act, being the Long Term Capital Gain and further adding 2% thereon as
commission expenses on the sale of shares of a listed company through
recognized stock exchange even when the identity and nature of the
source of the said capital gain were explained and proved.
(c) The learned Assessing Officer/CIT (Appeal) erred in law and facts in
passing the assessment orders solely on the basis of assumption,
presumptions, surmises and conjectures without any cogent material or
evidence. The reason given are wrong, contrary to the facts of the case
and against the provisions of law, hence it is illegal and contrary to the
principal of natural justice.
In view of the forgoing laws and facts, the addition made is unwarranted
and not justified and it is therefore, prayed that the same be deleted.”
As evident, the assessee is aggrieved by confirmation of certain additions as
unexplained / unaccounted income and also by confirmation of estimated
additions of commission against these transactions. To resolve the
controversy, it would be imperative to delve into correct factual matrix of the
case as brought on record by Ld. AO in quantum assessment order and as
adjudicated by Ld. CIT(A) in the impugned order.
3.2 Briefly stated the assessee being resident individual is stated to be
director and partner in the Vardhman Group of Companies and firms which
carries on the business as Builders & Developers, granting of loans &
advances and investment activities. The assessee earned Salary income in the
form of director’s remuneration from group companies and interest income on
loans during the year which has duly been reflected in the return of income.
The assessee also earned exempt income in the form of Long-Term Capital
Gains (LTCG), Share of profit from partnership firms, interest on PPF &
dividends etc. The sole subject matter of the appeal is certain addition on
account of Long-Term Capital Gains earned by the assessee during the year.
The assessee reflected LTCG of Rs. 293.88 Lacs on certain shares
transactions which were claimed to be exempt u/s. 10(38). The Ld. AO as
well as Ld. first appellate authority has denied the same and hence, this
appeal.
3.4 The record would show that an assessment was framed for year under
consideration u/s. 143(3) r.w.s. 153A of the Act on 21.12.2016 wherein the
income of the assessee was determined at Rs. 303.50 Lacs after certain
additions of unexplained income as against returned income of Rs. 3.74 Lacs
filed by the assessee on 25.09.2014. The LTCG earned by the assessee was
treated as its unaccounted income and Ld. AO had estimated commission
income against these transactions @ 2%.The said assessment stem from
search operations u/s. 132 as carried out by the department at various
residential and business premises of assessee group on 05.11.2014. During the
course of search at the residence of the assessee, excess jewellery worth Rs.
3.30 lacs was found which was offered to tax in statement u/s. 132(4).
Consequently, notices u/s. 153A & 143(2) were issued as per due process of
law.
3.5 During assessment proceedings, it transpired that various family members
of the group reflected LTCG aggregating in all to Rs. 3235.98 Lacs and
claimed the same to be exempt u/s. 10(38). The assessee-wise detail, in this
respect has been tabulated in para 4.1 of the quantum assessment order.
Accordingly, the assessee was asked to explain the genuineness of the
aforesaid LTCG. The amount of LTCG reflected by the assessee was Rs.
293.88 Lacs.
3.6 It transpired that the assessee made investment in the shape of 62,500
Equity Shares of an entity namely Santoshima Tradelink Ltd. (STL) during
the month of September, 2011. The face value of the share was Rs.10/- per
share with premium of Rs. 10/- per share and accordingly, the assessee paid a
sum of Rs. 12.50 Lacs to acquire the same. The shares were duly allotted in
due course and the shares certificates were received in physical form and the
shares were ultimately dematerialized in assessee’s account during March,
2012.
3.7 Meanwhile, M/s STL got amalgamated with another entity namely M/s
Sunrise Asian Ltd. (SAL) pursuant to a scheme of amalgamation u/s. 391 to
394 which was duly approved by Hon’ble Bombay High Court. As per the
scheme of amalgamation, share swap ratio was fixed as 1:1 and accordingly,
the shares of STL were swapped with the shares of SAL which were credited
in assessee’s demat account during the month of June, 2013. M/s SAL was a
public limited company and its shares were listed on Bombay Stock Exchange
as Group ‘A’ shares signifying that the shares were highly traded having
highest degree of liquidity.
3.8 The assessee sold these shares through online platform (BOLT) provided
by recognized stock exchange and delivered the shares in demat form to the
clearing house and received sale consideration through its stock-broker in the
month of March, 2014. The sale consideration was received through banking
channels. Since the investment was held for more than 1 year and the sale
transactions were undertaken through recognised stock exchange on which
Securities Transactions Tax (STT) was paid, the assessee apparently fulfilled
the conditions laid down in Section 10(38) and accordingly claimed
exemption of the gain. The LTCG earned on these transactions was worked
out to be Rs. 293.88 Lacs.
3.9 However, to verify the transactions, summons u/s. 131 were issued at the
address of M/s SAL which remained un-responded to. It transpired that a
search action was conducted at various places of one Shri Vipul Bhat on
05.02.2016 wherein it was revealed that Shri Vipul Bhat was controlling M/s
SAL and was engaged in rigging the share price of M/s SAL. Based on
outcome of search proceedings, an opinion was formed that M/s SAL was
merely a paper company engaged in providing accommodation entries to
(2021) ABC 279
various beneficiaries. This search was subsequent to search conducted on the
assessee on 05.11.2014. In the said background, the transactions carried out
by the assessee was subjected to scrutiny during assessment proceedings.
3.10 In defence of genuineness of stated transactions, the assessee furnished
copies of purchase and sales contract notes. The copies of financial statements
of M/s STL for F.Ys. 2009-10 & 2010-11, on the basis of which the decision
to make the investment was taken by the assessee, was also placed on record.
The assessee also submitted month-wise data of trading volume and price
range of shares of M/s SAL for more than 2 years i.e. from the month of Jan
2013 to July 2015. During the aforesaid period, the price range was
continuously shown to be in the range of Rs. 360-600 per share and the
trading volumes were shown to be in the range of 5 Lacs to 25 Lacs shares per
month. The price range was stated to be in the same range for 15 months after
the period of sale of shares by the assessee. Therefore, the allegations of
rigging or manipulation of shares were refuted. The assessee denied having
known Shri Vipul Bhat and submitted that it had no privy of contract with the
buyers of the shares since the shares were sold through recognised stock
exchange in online mode. In the above background, the assessee denied the
allegations of Ld. AO qua rigging / manipulation of share prices of M/s SAL.
3.11 However, it was noted that there was survey action u/s. 133A on
04.02.2016 in case of M/s SAL. During survey, the statement of Shri Kalpesh
Manahar Jani (Director of M/s SAL) was recorded wherein the said person
denied having any link with M/s SAL but submitted that Shri Vipul Bhat
appointed him as a director of M/s SAL. The survey on the premises of M/s
SAL revealed that given address was dummy office and it was a paper
company.
It was also noted that various entities controlled by Shri Vipul Bhat acted as
exit providers to the beneficiaries of the scrips. Two of these entities were M/s
Sampada Chemicals Ltd. & M/s Shipra Fabrics Pvt. Ltd.
The director of M/s Sampada Chemicals Ltd. namely Shri Kaushik Balubhai
Madhwani, during survey proceeding, denied having any link with entity M/s
Sampada Chemicals Ltd. Similarly, the director of M/s Shipra Fabrics Pvt.
Ltd. denied having any knowledge about the said entity and submitted that
this entity was being operated by Shri Vipul Vidur Bhatt.
Shri Vipul Vidur Bhat accepted under oath that he was involved in providing
accommodation entries against commission. He admitted to have manipulated
the share prices of M/s SAL for providing accommodation entries of LTCG.
3.12 The survey action led to issuance of search warrant u/s. 132 on
05.02.2016 in the name of Shri Vipul Vidur Bhat and his various entities
including M/s SAL. During search operations, statement of Shri Vipul Vidur
Bhat was recorded u/s. 132(4) wherein he admitted to have indulged in
providing accommodation entries to beneficiaries against commission.
3.13 To verify the genuineness of the transactions of various assessee of
Vardhan Group, trading data was collected from Stock Exchange. The details
of buyer who purchased the shares of Vardhan Group were tabulated in para
4.5 of the quantum assessment order. From the said analysis, a conclusion was
drawn that the shares were purchased by various concerns of Shri Vipul Bhat
only. It was also noted that there was circular trading within the group entities
of Shri Vipul Bhat which helped in manipulating the prices of M/s SAL.
3.14 Finally, applying the principle of human probability in terms of
decision of Hon’ble Supreme Court in Sumati Dayal v. CIT, (2016) 1 ITJ
Online 794 (SC) : (1995) 214 ITR 801 : (1995) 125 CTR 124 : (1995) 80
Taxman 89, these transactions were termed as manipulated transaction done
by the assessee in connivance with Shri Vipul Bhat to evade the taxes on
unaccounted income. In order to obtain such transactions, a commission
would usually be paid. The same was estimated @ 2%. The action of Ld. AO
resulted into an addition of Rs. 299.76 Lacs in the hands of the assessee.
3.15 In para-4 of the quantum assessment order, it was noted that the search
was conducted on the assessee on 05.11.2014. The return of income for A.Y.
2014-15 was already filed by that date. However, the time limit for issuance
of notice u/s. 143(2) had not expired. As a matter of fact, the return of income
for A.Y. 2014-15 was selected for scrutiny through CASS for the purpose of
examination of exempt LTCG. Therefore, the assessee’s contention that there
was no incriminating material found during the course of search operations
and therefore no addition based on material other than incriminating material
would be justified, could not be accepted. Accordingly, the assessment was
framed against the assessee.
4.1 Before Ld. CIT(A), the assessee assailed the addition by way of elaborate
written submissions which have already been extracted in para-4 of the
impugned order. The assessee vehemently controverted the findings of Ld.
AO by submitting that in the list of purchase of shares, as tabulated by Ld.
AO, there were independent buyers too. The assessee denied having known
Shri Vipul Bhat and denied having entered into any transactions with any of
his entities. It was reiterated that the shares were sold at the online platform of
the stock exchange through share broker. The assessee or the share broker
would have no control over the bidder / buyers of the shares in the online
platform. The assessee submitted that it had no dealing or control over M/s
SAL and therefore, he was not obligated under law to produce any such party.
In fact, it was onus of Ld. AO to provide cross-examination of the said party
whom he was trying to link assessee with. On the other hand, the assessee
discharged his onus to prove the genuineness of the transactions by providing
all the relevant direct documentary evidences. The Ld. AO heavily relied
upon the findings of investigation wing without carrying out any independent
investigation of his own. Nothing was brought on record which would
establish that the assessee was beneficiary of alleged accommodation entries
provided by the so-called Shri Vipul Bhat. No corroborative evidences to
(2021) ABC 281
support the findings of Ld. AO were brought on record. The documentary
evidences submitted by the assessee were neither verified nor examined.
Further, no contrary and conclusive evidences were brought on record to
dispute the said documentary evidences furnished by the assessee.
4.2 The attention was drawn to the fact that sale transactions took place
through recognized stock exchange and statutory Securities Transaction Tax
(STT) was paid on sale transactions. In the online platform, the identity of the
seller as well as purchaser would not be known. The shares were delivered in
demat form though clearing mechanism of the stock exchange. Therefore,
unless any link is established, the assessee could not be held to be part of the
group indulging into rigging shares prices of the scrips. The sale proceeds
were realised through banking channels. There was no evidence of any cash
exchange. The findings as well as conclusion of Ld. AO were based on mere
suspicion, surmises and hearsay as against settled proposition of law that
suspicion howsoever strong could not partake the character of legal evidence.
The entire case of Ld. AO was based on mere presumption that the assessee
ploughed back its own unaccounted money in the form of bogus LTCG. The
presumption needs to be corroborated by some evidence to establish the same.
For the said proposition, reliance was placed on catena of judicial
pronouncements of Hon’ble High Courts as well Tribunal which has already
been enumerated in the impugned order.
4.3 The assessee also raised a plea of violation of principle of natural justice
by submitting that the statement of Shri Vipul Bhat was never confronted to
the assessee and no opportunity to cross-examine the said person was ever
provided to the assessee. More so, Shri Vipul Bhat did not state as to how he
was connected with the assessee. In the absence of any such admission, the
statement would have no evidentiary value. For aforesaid submissions,
reliance was placed, inter-alia, on the decision of Hon’ble Supreme Court in
Andaman Timer Industries Ltd., (2019) 7 ITJ Online 245 (SC) (Civil Appeal
No. 4228 of 2006) & the decision of Kishanchand Chellaram v. CIT, (2018) 5
ITJ Online 287 (SC) : (2016) 28 ITJ 39 : (1980) 125 ITR 713 : (1980) 19
CTR 360 : (1980) 4 Taxman 29.
4.4 The assessee also raised a plea that in the absence of any incriminating
material found during the course of search operations, the additions would not
be sustainable. However, this plea was rejected by Ld. CIT(A) which has
already been enumerated by us in preceding para 3.15. Similar plea has been
raised before us by Ld. AR. However, we are completely in agreement with
the stand of Ld. CIT(A) in this regard and therefore, reject this plea.
4.5 The Ld. CIT(A), in the background of judicial decision on circumstantial
surrounding evidences, noted that entire network of documents was
manipulated and created by Shri Vipul Bhat and his associates with the sole
purpose of providing bogus LTCG to various beneficiaries including the
assessee and his family members. The same would be evident from statement
of Shri Vipul Bhat u/s. 132(4) on 04.02.2016 & 09.02.2016 during the course
of search proceedings. The relevant portion of the same has been extracted in
the impugned order. Based on said statement, it was concluded that director of
M/s SAL was a dummy director and Shri Vipul Bhat was the actual controller
of said entity. The steep rise in the prices of shares were manipulated and
controlled / managed by Shri Vipul Bhat and his associates. The exit
providers to the assessee were manipulated and controlled by Shri Vipul Bhat
and his associates. The statement of concerned persons of exit provider
entities was also noted in para-7 of the impugned order whereupon a
conclusion was drawn that the persons controlling these entities were
invariably persons of very small means. Their identity was used by Shri Vipul
Bhat to create bogus companies. These persons were not aware about the
share transactions. As per the statement of Shri Vipul Bhat, one Shri Sandeep
Maroo was the intermediary who introduced Vardhan family to him and the
said group is a beneficiary of Long-Term Capital Gains.
4.6 The family members of Vardhan group, during search proceedings on the
group, stated that entire dealings were done by Shri Ramesh Vardhan whose
statement was recorded on 12.05.2016. Shri Ramesh Vardhan, in reply to
question no. 64, submitted that trading in Shares of M/s SAL was genuine
transactions thorough stock exchange following all process and legal
procedures. The statement of Shri Vipul Bhat was confronted to the assessee
in question no. 65. However, Shri Ramesh Vardhan denied being aware of the
facts stated therein and reiterated that shares were sold through brokers and
payments were received through banking channels.
4.7 The Ld. CIT(A), at para-9.2 of the impugned order, observed that the
shares were acquired offline and large number of shares were allotted as
bonus / preferential shares. Such offline purchase of shares on which
abnormal LTCGs from the penny stock companies has been declared, would
be a strong indicator of bogus nature of entire transactions.
4.8 Finally, the plethora of documentary evidences submitted by the assessee
in support of the transactions were termed as self-serving documents and the
action of Ld. AO, in making the additions, was confirmed.
Aggrieved, the assessee is under further appeal before us.
5. The Ld. Authorized Representative for Assessee (AR), reiterating the
submission made before Ld. CIT(A), vehemently assailed the impugned
order. Au Contraire, Ld. CIT-DR supported the findings of lower authorities
and pleaded for confirmation of impugned order.
6. We have carefully heard the rival submissions and perused relevant
material on record. So far as the factual matrix is concerned, there is no
substantial dispute regarding the same. The perusal of record would reveal
that the assessee purchased certain shares of an entity namely M/s STL as
early as September, 2011. The shares were converted into demat form in
assessee’s account during the month of March, 2012. The transactions took
place through banking channels. The investments were duly reflected by the
assessee in financial statements of respective years. The copies of financial
(2021) ABC 283
statements of M/s STL for F.Ys. 2009-10 & 2010-11 which led to investment
by the assessee in that entity was also furnished during the course of
assessment proceedings. Subsequently, M/s STL got merged with another
entity viz. M/s SAL pursuant to scheme of amalgamation u/s. 391 to 394 of
The Companies Act, 1956. The Scheme was duly approved by Hon’ble
Bombay High Court vide order dated 22.03.2013, a copy of which is on
record. Consequently, the shares of M/s STL held by the assessee got
swapped with the shares of M/s SAL and new shares were allotted to the
assessee during June, 2013 pursuant to the approved scheme of
amalgamation. M/s SAL is stated to be listed public company Group ‘A’
shares signifying high trades with high liquidity. The assessee has sold these
shares through its stock broker namely M/s Unique Stockbro Private Limited
in online platform of the recognised stock exchange during the month of
March, 2014. The selling price was in the range of Rs. 489/- to Rs. 491/- per
share. The transactions took place through online mechanism after complying
with all the formalities and procedure including payment of STT. The
delivery of the shares was through clearing mechanism of the stock exchange
and sale consideration was received through banking channels. The
transactions are duly evidenced by contract notes, demat statements, bank
statements and other documentary evidences. The key person of assessee
group, in his statement, maintained the position that trading transactions were
genuine transactions carried out through stock exchange following all process
and legal procedures. The assessee also filed trading volume data and price
range of the scrip for a period of more than 2 years i.e. from Jan, 2013 to July,
2015. The shares reflected healthy trading volume and the price range
reflected therein was in the range of Rs. 360/- to Rs. 600/- per share. The
price range was stated to be in the same range for 15 months after the period
of sale of shares by the assessee, which has not been disputed by the revenue.
On the basis of all these facts, it could be gathered that the assessee had duly
discharged the onus casted upon him to prove the genuineness of the stated
transactions and the onus had shifted on revenue to rebut the same.
7. As against the assessee’s position, the primary material to make additions
in the hands of assessee is the statement of Shri Vipul Bhat and the outcome
of search proceedings on his associated entities including M/s SAL. However,
there is nothing on record to establish vital link between the assessee group
and Shri Vipul Bhat or any of his group entities. The assessee, all along,
denied having known Shri Vipul Bhat or any of his group entities. However,
nothing has been brought on record to controvert the same and establish the
link between Shri Vipul Bhat and the assessee. The opportunity to cross-
examine Shri Vipul Bhat was never provided to the assessee which is contrary
to the decision of Hon’ble Supreme Court in M/s Andaman Timber Industries
v. CCE, (2019) 7 ITJ Online 245 (SC) (CA No.4228 of 2006) wherein it was
held that not allowing the assessee to cross-examine the witnesses by the
adjudicating authority though the statement of those witnesses were made the
basis of the impugned order is a serious flaw which makes the order nullity in
as much as it amounts to violation of principal of natural justice because of
which the assessee was adversely affected. The whole basis of making the
addition is third party statement without there being any tangible material. It
is trite law that additions merely on the basis of suspicious, conjectures or
surmises could not be sustained in the eyes of law as held by Hon’ble
Supreme Court in Omar Salay Mohamed Sait v. CIT, (1959) 37 ITR 151
(SC) . The suspicion however strong could not partake the character of legal
evidence as held by Hon’ble Supreme Court in Umacharan Shaw & Bros. v.
CIT, (1959) 37 ITR 271 (SC). Therefore, we find that onus as caster upon
revenue to corroborate the impugned additions by controverting the
documentary evidences furnished by the assessee and by bringing on record,
any cogent material to sustain those additions, could not be discharged by the
revenue. The allegation of price rigging / manipulation has been levied
without establishing the vital link between the assessee and various entities of
Shri Vipul Bhat. We find that the whole basis of making additions is third
party statement and no opportunity of cross-examination has been provided to
the assessee to confront the said party. As against this, the assessee’s position
that that the transactions were genuine and duly supported by various
documentary evidences, could not be disturbed by the revenue.
8. The allegations of Ld. AO that the assessee was part of the group which
indulged in rigging or manipulation of prices of shares in connivance with
Shri Vipul Bhat is not backed by any independent material. Firstly, there is
nothing on record which establishes the fact that the assessee was acquainted
with Shri Vipul Bhat or any of his entities and secondly, the onus casted upon
assessee to prove the genuineness of the transactions was already discharged
by the assessee. Shri Vipul Bhat, in his statement, stated that one Shri
Sandeep Maroo acted as intermediary who introduced Vardhan family to him.
However, no further investigations have been carried out to establish this vital
link between the assessee and Shri Vipul Bhat. We do not find any
independent investigations by Ld. AO to bring on record any tangible material
to corroborate the same. There are no evident or even allegation of any cash
exchange between the assessee and group entities of Shri Vipul Bhat. This is
further evidenced by the fact that no substantial incriminating material /
wealth of that magnitude has been found during the course of search
operations on assessee which would corroborate such presumption and prove
that the transactions were sham transactions, in any manner.
9. The fact that the assessee could not produce the concerned person of M/s
SAL was rightly controverted by submitting that the aforesaid entity was not
under the control of the assessee and the assessee was under no obligation to
do so. The existence of M/s SAL is beyond doubt since it was a listed
corporate entity and secondly, it was subject matter of scheme of
amalgamation u/s. 391 to 394. The scheme of amalgamation was duly been
approved by Hon’ble Bombay High Court. Therefore, the existence of the
said entity could not be doubted, in any manner.
(2021) ABC 285
10. The above conclusion is further fortified by the fact that in share sale
transactions through online mode, the identity of the buyer of the shares
would not be known to the assessee. Therefore, the adverse conclusion drawn
by Ld. AO merely on the basis of the fact that the buyer of the shares were
group entities of Shri Vipul Bhat, could not be sustained. The fact that there
were independent buyers also would rebut the same and weaken the
conclusion drawn by Ld. AO.
11. The Ld. AR has relied on plethora of judicial pronouncements in support
of various submissions, which we have duly considered. These decisions
would only support the conclusions drawn by us that once the assessee has
discharged the onus of proving the genuineness of the transactions, the onus
would shift on the revenue to dislodge assessee’s claim and bring on record
contrary evidences to rebut the same. Until and unless this exercise is carried
out, the additions could not be sustained in the eyes of law.
12. To enumerate the few, the Hon’ble Bombay High Court in CIT v. Shyam
S. Pawar, (2019) 7 ITJ Online 241 (Bombay) : (2015) 229 Taxman 256 :
(2015) 54 Taxmann.com 108 declined to admit revenue’s appeal since the
revenue failed to carry forward the inquiry to discharge this basic onus. The
co-ordinate bench of this Tribunal in Mukesh R.Marolia v. Addl. CIT, (2006)
6 SOT 247 (Trib.-Mum.) dt. 15.12.2005 held that personal knowledge and
excitement on events should not lead the Assessing Officer to a state of affairs
where salient evidences are over- looked. When every transaction has been
accounted, documented and supported, it would be very difficult to brush
aside the contentions of the assessee that he had purchased shares and had
sold shares and ultimately purchased a flat utilizing the sale proceeds of those
shares and therefore, the co-ordinate bench chose to delete the impugned
additions. We find that this decision was firstly been approved by Hon’ble
Bombay High Court vide ITA No. 456 of 2007 on 07.09.2011 and thereafter,
special leave petition against the said decision has been dismissed by Hon’ble
Supreme Court vide SLP No. 20146 of 2012 dated 27.01.2014 which is
reported as 88 CCH 0027 SCC.
The SMC Bench of Tribunal in Anraj Hiralal Shah (HUF) v. ITO, (ITA No.
4514/Mum/2018 dated 16.07.2019) held that in the absence of any evidence to
implicate the assessee or to prove that the transactions were bogus, the Long-
Term Capital Gains declared by the assessee could not be doubted with. This
case was dealing with gains earned by the assessee on sale of same scrip i.e.
M/s Sunrise Asian Ltd.
13. Therefore, considering the entirety of facts and circumstances, we are not
inclined to accept the stand of Ld. CIT(A) in sustaining the impugned
additions in the hands of the assessee. Resultantly, the addition on account of
alleged Long-Term Capital Gains as well as estimated commission against the
same, stands deleted. The grounds of appeal, to that extent, stand allowed.
14. The grounds relating to levy of interest as well as initiation of penalty,
being consequential in nature, would not require any specific adjudication on
our part. Finally, the appeal stands partly allowed in terms of our above order.
ITA No. 7649, 7650, 7651, 7662 / Mum/2019 for A.Y. 2014-15:
15. It is an admitted position that facts are pari-materia the same in all these
appeals. The assessment was framed in the hands of various assessee, in
similar manner, wherein Long-Term Capital Gains earned by all the four
assessee were treated as unexplained income and added to their income with
further addition of estimated commission income of 2%. The impugned orders
are on similar lines. The assessee is before us with identical grounds of
appeal. Therefore, our findings, conclusion as well as adjudication as for ITA
No. 7648/Mum/2019 shall mutatis- mutandis apply to all these appeals as
well. Resultantly, all these appeals stand partly allowed, in similar manner.
Conclusion
16. All the appeal stands partly allowed in terms of our above order.
17. Order pronounced in the open court on 11th August, 2020.
___________
(2021) ABC 287
Suresh Kumar Agarwal
Reference Judgments
(2016) 2 ITJ Online 929 (Madras)

In the High Court of Madras
N. Mohammed Ali
v.
Income Tax Officer
Shri V. Ramasubramanian and Shri T. Mathivanan, JJ.
T.C.(A) Nos. 1091 and 1092 of 2006
27th October, 2015
Disallowance of Cash Purchase-S.40A(3) of Income Tax Act,1961-Revisional
Jurisdiction exercised by Commissioner U/s. 263 of Income Tax Act,1961-
Appeal Against the Order of Commissioner-Scrutiny Assessment Carried out
by the AO u/s. 143(3) of Income Tax Act,1961-
Q1 & Q2-Juridiction U/s. 263 of Commissioner-Held- Without examining
the details of the expenditure involved, the assessing officer accepted the sales
turnover reported by the assessee and allowed the benefit of deduction under
Section 40A(3). The question as to whether the assessee had made payments
in excess of Rs. 20,000/- on a single day to a single person was not examined
by the assessing officer. This is an error that led the Commissioner to initiate
proceedings under Section 263.
-The fact that this aspect was not gone into by the assessing officer in his
scrutiny assessment order dated 31.03.2003 is borne out from para 3 of the
said order. Once it is seen that such an error was committed, the next question
is as to whether the same was prejudicial to the interest of the Revenue or not.
The answer to this question is too obvious for any elaborate detail.
-If the assessee is not entitled to a deduction under Section 40A(3), the
income chargeable to tax will go up and the tax payable by him will naturally
go up. If it is not, the benefit goes to the assessee. Therefore, it is clear that
this is a case which satisfies the twin requirements under Section 263(1)
-Q3 Applicability of S.40 A (3) of Income Tax Act,1961-Held- Section 40A
deals with expenses or payments not deductible in certain circumstances.
Under sub-section (3) of Section 40A, any expenditure incurred by an
assessee, if made to a person in a day, otherwise than by way of an account
payee cheque drawn on a bank or account payee in excess of Rs. 20,000/-, no
deduction can be allowed. The details furnished in the show cause notice
dated 18.02.2005 by the Commissioner show that the assessee had admittedly
made payments of Rs. 1,00,000/- on three different dates viz., 01.10.1999,
14.10.1999 and 20.10.1999. The assessee had made payments of Rs. 2,00,000
on 31.10.1999, 02.11.1999 and 03.11.1999. All those payments are indicated
in the books of accounts of the assessee to have been made to a supplier by
name “Standard Fireworks”. Similarly payments have been made to another
supplier by name “Sivakasi Fireworks”. Since the name of one supplier
mentioned in the books of accounts of the assessee himself to whom a
payment of more than Rs. 20,000/- had been made on everyone of those days,
the contingencies stipulated in sub-section (3) of Section 40A have arisen.
Hence, the third question is answered against the assessee.
-Q4-Buisness Expidency-Held- This question has arisen for consideration in
view of the proviso found in sub-section (3) of Section 40A-In the absence of
any specific detail, the vague statements made in response to the show cause
notice, cannot offset the entries made in the books of accounts. Therefore, we
cannot find fault with the conclusion reached either by the Commissioner or
by the Tribunal in this regard Hence, the fourth question of law is answered
against the assessee
-Q5-Exceptional Circumstances-Rule 6DD of Income Tax Rules,1969-
Held-Some of the exceptional circumstances that would meet the
requirements of the Rule are indicated in Circular No. 220 dated
31.5.1977 that reads as follows :–
“Illustrative situations of 'exceptional circumstances' - All the
circumstances in which the conditions laid down in Rule 6DD(j) would
be applicable cannot be spelt out. However, some of them which would
seem to meet the requirements of the said rule are:
(a) the purchaser is new to the seller; or
(b) the transactions are made at place where either the purchaser or the
seller does not have a bank account; or
(c) the transactions and payments are made on a bank holiday; or
(d) the seller is refusing to accept the payment by way of crossed
cheque/draft and the purchaser's business interest would suffer due
to non-availability of goods otherwise than from this particular
seller; or
(e) the seller, acting as a commission agent, is required to pay cash in
turn to persons from whom he has purchased the goods; or
(f) specific discount is given by the seller for payment to be made by
way of cash. - Circular No. 220 (F.No. 206/17/76-IT(A-II)), dated
31.05.1977.”
-Unfortunately, the assessee neither pleaded nor proved the existence of any
one of those circumstances indicated in Rule 6DD. Therefore, Rule 6DD
cannot also go to the rescue of the appellant/assessee. Hence, the fifth
question of law is also to be answered against the assessee
Final outcome – Appeal Dismissed.
Relevant Provisions :S.40A & S.263 of Income Tax Act,1961
(2021) ABC 289
CIT v. Chowdhary & Co. (1996) 217 ITR 431 (All.) : 84 Taxman 495 [Refer
Para 9]
P.M. Abdul Razak v. ITO, (1997) 63 ITD 398 (Coch.) [Refer Para 9]
Counsel :
– S. Sridhar, for the Appellant;
– M. Swaminathan and Ms. V. Pushpa, for the Respondent.
JUDGMENT
Shri V. Ramasubramanian, J. :
1. Both the appeals, filed under Section 260A of the Income Tax Act, 1961,
were admitted on the following substantial questions of law :–
“(1) Whether the Appellate Tribunal is correct in upholding the order of
the Commissioner of Income Tax in revising the assessment for the
Assessment Year 2000-2001 under Section 263 of the Act to disallow the
cash purchases in terms of Section 40A(3) of the Act?
(2) Whether the Appellate Tribunal is correct in confirming the validity
of the assumption of jurisdiction of the Commissioner of Income Tax in
terms of Section 263 of the Act for revising the order of assessment
relating to the Assessment Year 2000-2001?
(3) Whether the Tribunal is correct in confirming the applicability of the
provisions of Section 40A(3) of the Act while justifying the disallowance
at 20% of the total cash purchases made in the Assessment Year 2000-
2001 and 2001-2002?
(4) Whether the Tribunal is correct in overlooking the business
compulsions and expediency in making the cash purchases on the facts
and in the circumstances of the case in the assessment years under
consideration which would make the said provisions of Section 40A(3)
of the Act inapplicable to make the disallowance contemplated?
(5) Whether the Tribunal is correct in concluding that Rule 6DD of the
Income Tax Rules, 1962, had no application to the cash purchases inspite
of the fact that the fire crackers purchased by cash under compelling
circumstances were manufactured without aid of power in a cottage
industry?”
2. Heard Mr. S. Sridhar, learned Counsel for the appellant and Mr. M.
Swaminathan, learned standing counsel for the Department.
3. The appellant/assessee is carrying on business of dealing in stationery. It
appears that during festive seasons, the appellant/assessee also carried on
business in purchase and sale of crackers.
4. For the Assessment Year 2001-2002 the assessee purchased crackers for
a value of Rs. 1,12,51,956/-. Excepting two payments to the total value of Rs.
9,50,000/-, which were paid by way of cheques, the remaining payments were
made by the assessee by way of cash. Since many of those payments were in
excess of Rs. 20,000/-, the assessee was denied deduction in terms of Section
40A(3). The assessing officer also held that the case was not covered by the
exceptions provided under Rule 6DD of the Income Tax Rules, 1962.
5. As a consequence, the assessing officer disallowed 20% of the cash
purchases made in excess of Rs. 20,000/-. This resulted in addition of Rs.
20,53,191/-.
6. On an appeal by the assessee, the assessee contended that business
expediency compelled him to make such payments. But, the Commissioner of
Income Tax (Appeals) rejected the appeal.
7. Therefore, the assessee filed a further appeal in ITA No. 272 of 2005.
8. In the meantime, a notice under Section 263 was issued on 18.02.2005 in
respect of Assessment Year 2000-2001, pointing out that the assessment in
relation to the Year 2000-2001 was erroneous and had resulted in an order
prejudicial to the interest of the Revenue. Though there were also other
reasons, the main reason for the issue of a show cause notice under Section
263 was that the assessee had purchased crackers for a total amount of Rs.
20,00,000/- and that out of the same, only two payments were for an amount
less than Rs. 20,000/-. Other payments, which were far in excess of Rs.
20,000/-, had been made by way of cash. Therefore, by the notice issued
under Section 263, the Commissioner of income Tax sought to disallow the
claim under Section 40A(3).
9. The assessee submitted a reply on 28.2.2005 claiming business
expediency with reference to the seasonal nature of the business. The assessee
also relied upon the decision in CIT v. Chowdhary & Co. (1996) 217 ITR 431
(All.) : 84 Taxman 495 and P.M. Abdul Razak v. ITO, (1997) 63 ITD 398
(Coch.). But, the Commissioner of Income tax overruled the objections and
passed order dated 30.03.2005 disallowing the claim under Section 40A(3)
and directing the assessing officer to modify the assessment.
10. As against the said order of assessment, the assessee filed appeal in ITA
No. 1035 of 2005. Since ITA No. 1035 of 2005 arose out of an order passed
under Section 263 in relation to the Assessment Year 2000-2001, it was taken
along with ITA No. 272 of 2005 that arose out of regular assessment
proceedings in respect of the Assessment Year 2001-2002. Both the appeals
were dismissed by the Income Tax Appellate Tribunal by a common order
dated 26.10.2005. It is against the said common order, the assessee has come
up with the above appeals.
11. Out of the five questions of law framed by this court on 26.06.2006
while admitting the above appeals, the first two questions revolve around the
assumption of jurisdiction by the Commissioner under Section 263. The third
question relates to the applicability of Section 40A(3). The fourth question
relates to the issue of business expediency. The fifth question relates to the
(2021) ABC 291
application of Rule 6DD. Therefore, we shall deal with these questions in the
same order.
12. Questions 1 and 2 :– The question of assumption of jurisdiction under
Section 263 can be disposed of without much ado. Section 263(1) empowers
the Commissioner to call for and examine the record of any proceedings
under the Act. If the Commissioner considers, upon such examination, that
any order passed by the assessing officer was erroneous insofar as it is
prejudicial to the interest of the Revenue, the Commissioner may pass an
order modifying the order, of course, after issuing a show cause notice and
holding an enquiry. Therefore, two requirements are to be satisfied under
Section 263(1). They are (1) that the order passed by the assessing officer is
considered by the Commissioner to be erroneous and (2) that such error has,
actually, been prejudicial to the interest of the Revenue.
13. In the case on hand, a scrutiny assessment was made in relation to the
Assessment Year 2000-2001 on 31.03.2003. It was an assessment made under
Section 143(3) of the Act. In para 3 of the said order, the assessing officer
took note of the fact that the assessee was engaged in seasonal business of
selling crackers apart from the routine business of dealing in stationery items
and that he did a turnover to the extent of Rs. 19.48 lakhs. A declaration to the
said effect was also filed only on 25.03.2003 in the course of scrutiny
assessment proceedings. In other words, but for the scrutiny assessment, we
do not know whether this could have, actually, come to light.
14. Without examining the details of the expenditure involved, the assessing
officer accepted the sales turnover reported by the assessee and allowed the
benefit of deduction under Section 40A(3). The question as to whether the
assessee had made payments in excess of Rs. 20,000/- on a single day to a
single person was not examined by the assessing officer. This is an error that
led the Commissioner to initiate proceedings under Section 263.
15. The fact that this aspect was not gone into by the assessing officer in his
scrutiny assessment order dated 31.03.2003 is borne out from para 3 of the
said order. Once it is seen that such an error was committed, the next question
is as to whether the same was prejudicial to the interest of the Revenue or not.
The answer to this question is too obvious for any elaborate detail.
16. If the assessee is not entitled to a deduction under Section 40A(3), the
income chargeable to tax will go up and the tax payable by him will naturally
go up. If it is not, the benefit goes to the assessee. Therefore, it is clear that
this is a case which satisfies the twin requirements under Section 263(1).
Consequently, questions 1 and 2 are answered against the assessee.
17. Question No. 3 :– As we have stated earlier, the third question relates to
the applicability of the provisions of Section 40A(3). Section 40A deals with
expenses or payments not deductible in certain circumstances. Under sub-
section (3) of Section 40A, any expenditure incurred by an assessee, if made
to a person in a day, otherwise than by way of an account payee cheque drawn
on a bank or account payee in excess of Rs. 20,000/-, no deduction can be
allowed. The details furnished in the show cause notice dated 18.02.2005 by
the Commissioner show that the assessee had admittedly made payments of
Rs. 1,00,000/- on three different dates viz., 01.10.1999, 14.10.1999 and
20.10.1999. The assessee had made payments of Rs. 2,00,000 on 31.10.1999,
02.11.1999 and 03.11.1999. All those payments are indicated in the books of
accounts of the assessee to have been made to a supplier by name “Standard
Fireworks”. Similarly payments have been made to another supplier by name
“Sivakasi Fireworks”. Since the name of one supplier mentioned in the books
of accounts of the assessee himself to whom a payment of more than Rs.
20,000/- had been made on everyone of those days, the contingencies
stipulated in sub-section (3) of Section 40A have arisen. Hence, the third
question is answered against the assessee.
18. Question No. 4 :– The fourth question revolves around business
expediency. This question has arisen for consideration in view of the proviso
found in sub-section (3) of Section 40A. At this stage, it would be relevant to
extract sub-section (3) as well as proviso to sub-section (3) which reads as
under :–
“Where the assessee incurs any expenditure in respect of which a
payment or aggregate of payments made to a person in a day, otherwise
than by an account payee cheque drawn on a bank or account payee bank
draft, exceeds twenty thousand rupees, no deduction shall be allowed in
respect of such expenditure.
Proviso to (3A) reads as follows :–
Provided that no disallowance shall be made and no payment shall be
deemed to be profits and gains of business or profession under sub-
section (3) and this sub-section where a payment or aggregate of
payments made to a person in a day, otherwise than by an account payee
cheque drawn on a bank or account payee bank draft, exceeds twenty
thousand rupees, in such cases and under such circumstances as may be
prescribed, having regard to the nature and extent of banking facilities
available, considerations of business expediency and other relevant
factors;”
19. As seen from the proviso, the question in relation to sub-section (3) has
to be examined with reference to the three things indicated in the proviso.
They are (1) the nature and extent of banking facilities (2) considerations of
business expediency and (3) other relevant factors.
20. In other words, under sub-section (3), where an assessee incurs an
expenditure which involves payment of more than Rs. 20,000/- to a single
person on a single day, he is not entitled to any deduction in respect of such
expenditure. The rule under sub-section (3) is not very rigid. It admits of three
exceptions, which are narrated in the proviso. If an assessee could prove that
having regard to the nature and extent of banking facilities, or having regard
to the consideration regarding business expediency or having regard to the
other relevant factors, it would not be possible for him to make payments by
(2021) ABC 293
way of cheque or demand draft, the assessee would, still, be entitled to
deduction. Therefore, it is for the assessee to prove the existence of (1) nature
and extent of banking facility that compelled him to make payment in cash (2)
consideration of business expediency that compelled him to make payments
in cash and (3) any other relevant factors that would justify such a payment.
21. In the case on hand, the books of accounts maintained by the assessee
reflected that payments were made to three different suppliers. One was
Standard Fireworks, the second was Indira Prints Pack and the third supplier
was Sivakasi Fireworks. But, insofar as, Indira Prints Pack is concerned,
payment was less than Rs. 20,000/-. Therefore, that has not led to any
problem. But, insofar as the other two suppliers are concerned, the books of
accounts reflect that payments in excess of Rs. 20,000/- to each one of those
two suppliers was made on a day to day basis. This is seen from the tabulation
given in the show cause notice under Section 263, which reads as follows:–
Name of supplier Date of payment by cash Amount Remarks
Standard Fire Works 27.07.1999 1,200.25
01.10.1999 100,000
14.10.1999 100,000
20.10.1999 100,000
28.10.1999 150,000
31.10.1999 200,000
01.11.1999 159,000
02.11.1999 200,000
03.11.1999 200,000
04.11.1999 196,109.8
24.11.1999 150,000
28.01.2000 50,000
Indira Prints Pack 06.10.1999 8,750
Sivakasi Fire Works 05.11.1999 200,000
06.11.1999 200,000
06.11.1999 42,709.8
22. In response to the show cause notice, the assessee submitted that they
were not purchasing crackers from the companies themselves, but, were
purchasing the crackers from the agents and retailers in the villages. The
relevant para of the defence taken by the assessee in their reply to the show
cause notice is extracted as under :–
“The retailers in the villages closes their shops after days business and
visits the city for their requirements of purchases in late evening hours.
They come to city by night 9 pm or so and the crackers business starts
only after 9 pm. It goes upto 1 pm in the night. The parcels are made in
the night only and the shop is opened in the next day by 11 am or so.
The assessee has made payments in cash each less than Rs. 20,000/- only
to the agent. The seller's representative visits the shop and collects the
sale proceeds every now and then, and issue valid receipts. This happens,
normally and mainly everyday evening upto night 1 pm.”
23. But, unfortunately, the books of accounts do not disclose (1) either that
payments were made to agents of those suppliers or (2) that such payments
were made in bits and pieces. The table which we have extracted above shows
the consolidation of payments made on every day to everyone of those
suppliers. Sub-section (3) uses even the expression "aggregate of payment
made to a person in a day" Therefore, any amount of explanation that the
assessee gave in response to the show cause notice, could not have gone
against the very entries made in the books of accounts.
24. We are not for a moment to be understood to suggest that the books of
accounts should have been more carefully drawn. All that we are suggesting is
that atleast the names of the agencies or agents or retailers to whom payments
were made on a day to day basis, on behalf of the original manufacturers
should have been mentioned. In the absence of any specific detail, the vague
statements made in response to the show cause notice, cannot offset the
entries made in the books of accounts. Therefore, we cannot find fault with
the conclusion reached either by the Commissioner or by the Tribunal in this
regard Hence, the fourth question of law is answered against the assessee.
25. Coming to the fifth question which revolves around Rule 6DD of the
Income Tax Rules, 1969, it is seen that Rule 6DD speaks about exceptional
circumstances. Some of the exceptional circumstances that would meet the
requirements of the Rule are indicated in Circular No. 220 dated
31.5.1977 that reads as follows :–
“Illustrative situations of 'exceptional circumstances' - All the
circumstances in which the conditions laid down in Rule 6DD(j) would
be applicable cannot be spelt out. However, some of them which would
seem to meet the requirements of the said rule are:
(a) the purchaser is new to the seller; or
(b) the transactions are made at place where either the purchaser or the
seller does not have a bank account; or
(2021) ABC 295
(c) the transactions and payments are made on a bank holiday; or
(d) the seller is refusing to accept the payment by way of crossed
cheque/draft and the purchaser's business interest would suffer due
to non-availability of goods otherwise than from this particular
seller; or
(e) the seller, acting as a commission agent, is required to pay cash in
turn to persons from whom he has purchased the goods; or
(f) specific discount is given by the seller for payment to be made by
way of cash. - Circular No. 220 (F.No. 206/17/76-IT(A-II)), dated
31.05.1977.”
26. Unfortunately, the assessee neither pleaded nor proved the existence of
any one of those circumstances indicated in Rule 6DD. Therefore, Rule 6DD
cannot also go to the rescue of the appellant/assessee. Hence, the fifth
question of law is also to be answered against the assessee. Accordingly, it is
answered. In the result, both the Tax Case Appeals are dismissed. No costs.
_____________
(2018) 2 ITJ Online 194 (Gujarat)

In the High Court of Gujarat
Pushpak Bullion (P.) Ltd.
v.
Dy. Commissioner of Income Tax
Shri Akil Kureshi and Shri Biren Vaishnav, JJ.
Special Civil Application No. 3279 of 2016
22nd August, 2017
Reopening of Assessment-S.147 of Income Tax Act,1961-Notice U/s. 148 of
Income Tax Act,1961 by Assessing Officer-Notice Dated 27/03/2015 for AY
2008-09-Original Assessment carried out under the provisions of S.143(3) of
Income Tax Act,1961-Assessee contended that-The impugned notice has been
issued beyond a period of four years from the end of the relevant assessment
year. There was no failure on part of the assessee to disclose truly and fully all
material facts. The impugned notice is therefore, bad in law-It was found that
the assessee company was also availing the accommodation entries from said
Shri Chandrakant Patel. The petitioner assessee also maintained bank account
in the same branch of Union Bank of India. The study of the bank account of
the assessee showed that debit in name of M/s. Shiyon Enterprises between
20.12.2007 to 31.03.2008 came to a total of Rs.219.96 crores (rounded off).
During the Assessment Year 2008-2009, the assessee company had debited
purchases from M/s. Shiyon Enterprises in the books of account. Inter-alia on
such grounds, the Assessing Officer formed a belief that the purchases made
by the assessee from M/s. Shiyon Enterprises were bogus purchases and
corresponding income had escaped assessment-Held-The fact that the

assessee's sales and purchases came up for scrutiny during the original
assessment would be of no consequence since now the Assessing Officer
relies on material which was not part of the assessment proceedings and
which material was provided by the investigation wing unearthed during the
course of investigation in case of Shri Chandrakant Patel.In the end the
petition is dismissed being devoid of merits. Rule is discharged. Interim relief,
if any stands vacated.
Final outcome – Dismissed

Relevant Period: A.Y..2008-09
Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd., (2016) 2 ITJ Online
289 (SC) : (2014) 10 STD 602 : (2007) 291 ITR 500 : (2007) 210 CTR 30 :
(2007) 161 Taxman 316 : (2007) 9 ITJ 85 : (2008) 14 SCC 208 [Refer Para
6]
Yogendrakumar Gupta v. ITO, (2014) 366 ITR 186 (Guj.) [Refer Para 7]
Counsel :
– J.P. Shah, Sr. Counsel and Manish J. Shah, Advocate, for the Appellant;
– Nitin K. Mehta, Advocate, for the Respondent.
JUDGMENT
Shri Akil Kureshi, J. :
1. The petitioner has challenged a notice dated 27.03.2015 issued by the
respondent Assessing Officer seeking to reopen the petitioner's assessment for
the Assessment Year 2008-2009. To issue such notice, the Assessing Officer
had recorded the following reasons:
“In this case assessment for 2008-09 was finalized u/s.143(3) of the I.T.
Act of Rs.2,49,57,447/- as against returned income Rs.2,45,62,500/.
Total purchase sales shown by the assessee amounting to
Rs.31,29,45,78,609,60/- and Rs.31,34,42,28,043/- respectively.
The Dy. Director of Income tax (Inv.), Unit-2(3), Mumbai;400 038 vide
his letter No. DDIT(Inv.)/U-2(3)/ Intimation-AO/20l4-15 dated
23.03.2015 supplied the information that during the course of
investigation carried out by the Dy. Director of Income tax (Inv), Unit-
2(3), Mumbai-400 038 in the case of Shri Chandrakant Prahladbhai Patel
(PAN : AOZPP 4246 C) it was found from the Bank statements. that Shri
C.P. Patel indulged in Providing accommodation entries/bogus bills
without actual supply of any goods or services. It was further noticed that
most of the cheques issued from one of his Current Account
(2021) ABC 297
No.3l9801010038530, are preceded by substantial cash deposits. This
bank, account was maintained in the name of M/s. Shiyon Enterprises in
Union Bank of India. Zaveri Bazar Branch. The income declared by Shri
Patel as compared to the receipt shown by him in his Profit & Loss A/c
also supports the view that he is involved in providing accommodation
entries. The assessee company is found to be availing accommodation
entries from the aforesaid bank account of Shri C.P. Patel.
3. The Bank Account No. 319804040023854 maintained with Union
Bank of India. Zavcri Bazar Branch, Mumbai of M/s. Pushpak Bullions
Pvt. Ltd, shows debits in the name of M/s. Shiyon Enterprises for the
period from 20.12.2007 to 31.03.2008 totaling to Rs. 2199645000/.As
stated above M/s. Shiyon provides accommodation entries/bills.
4. It is also pertinent to mention from the scrutiny records for AY 2008-
09 that the assessee company has debited purchases from M/s. Shiyon
Enterprises in its books to the extent of Rs.3,15,10,29,852/-(Rs.
313,19,43,551/- for bullion a/c and Rs. 1,90,86,301/- on account of
jewellery a/c).
5. In view of above facts I have reason to believe that the purchases
made from M/s. Shiyon are bogus purchase because of which income has
been reduced and therefore the income chargeable to tax to the tune of
Rs. 3,15,10,29,852/- for A.Y. 2008-09 has escaped assessment.
Therefore this is the fit case for reopening the assessment u/s. 147 for the
A.Ys. 2008-09. Issue notice u/s. 148 of the I.T. Act.”
2. The assessee raised objections to the notice of reopening under
communication dated 05.06.2015. Such objections were rejected by the
Assessing Officer by an order dated 09.06.2015. The petitioner has therefore,
filed this petition.
3. Appearing for the petitioner, learned counsel Shri J.P. Shah vehemently
contended that the original assessment was framed after scrutiny. The
Assessing Officer during such scrutiny assessment had examined all aspects.
He thereafter, framed the scrutiny assessment making no additions or
disallowances. The impugned notice has been issued beyond a period of four
years from the end of the relevant assessment year. There was no failure on
part of the assessee to disclose truly and fully all material facts. The impugned
notice is therefore, bad in law.
4. Learned advocate Shri Nitin Mehta for the department opposed the
petition contending that the Assessing Officer has recorded detailed reasons.
At this stage, it is not necessary to examine the contentious issues threadbare
since the assessee would have full opportunity to participate in the assessment
proceedings. What is necessary to ascertain is whether the Assessing Officer
had tangible materials at his command to form a belief that the income
chargeable to tax had escaped assessment. He further pointed out that the
material at the command of the Assessing Officer now, was not part of the
assessment proceedings and could be unearthed only during investigation in
case of entities dealing with the petitioner. This was therefore, a clear case of
absence of true and full disclosures by the assessee. He submitted that the
requirement of true and full disclosure would not confine to filing of return
but would continue at all stages of the assessment. It is prima facie found that
the assessee's dealings with M/s. Shiyon Enterprises were bogus.
5. From the reasons recorded by the Assessing Officer for issuing the
notice, it can be seen that from the information supplied by the investigation
wing of the department at Mumbai, it was revealed that during the course of
investigation carried out in case of Shri Chandrakant Prahladbhai Patel, it was
found from his bank statement that he had indulged in providing
accommodation entries and bogus bills without actual supply of any goods or
services. Most of these cheques were issued from the current account
maintained by him and issuance of these cheques preceded by substantial cash
deposits in such account. The account was maintained in the name of M/s.
Shiyon Enterprises in Union Bank of India, Zaveri Bazar branch. There was
strong prima facie material suggesting that said Shri Chandrakant Patel was
providing accommodation entries. It was found that the assessee company
was also availing the accommodation entries from said Shri Chandrakant
Patel. The petitioner assessee also maintained bank account in the same
branch of Union Bank of India. The study of the bank account of the assessee
showed that debit in name of M/s. Shiyon Enterprises between 20.12.2007 to
31.03.2008 came to a total of Rs.219.96 crores (rounded off). During the
Assessment Year 2008-2009, the assessee company had debited purchases
from M/s. Shiyon Enterprises in the books of account. Inter-alia on such
grounds, the Assessing Officer formed a belief that the purchases made by the
assessee from M/s. Shiyon Enterprises were bogus purchases and
corresponding income had escaped assessment.
6. At the stage when we are examining the validity of a notice of reopening
of the assessment, the Court would not go into sufficiency of reasons recorded
by the Assessing Officer and if it is found that the Assessing Officer had
tangible materials at his command to form a bona fide belief of income
chargeable to tax had escaped assessment, there would be no interference with
the Assessing Officer proceeding further with the reassessment. In case
of Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd., (2016) 2 ITJ Online
289 (SC) : (2014) 10 STD 602 : (2007) 291 ITR 500 : (2007) 210 CTR 30 :
(2007) 161 Taxman 316 : (2007) 9 ITJ 85 : (2008) 14 SCC 208, the Supreme
Court observed that the expression "reason to believe" would mean cause or
justification. If the Assessing Officer has cause or justification to know or
suppose that income had escaped assessment, he can be said to have reason to
believe that income had escaped assessment. The expression cannot be read to
mean that the Assessing Officer should have finally ascertained the fact by
legal evidence or conclusion. What is required is reason to believe but not the
established fact of escapement of income. At the stage of issuance of notice,
the only question is whether there was relevant material on which a
reasonable person could have formed the requisite belief. Whether material
(2021) ABC 299
would conclusively prove escapement of income was not the concern at that
stage. This is so because the formation of the belief is within the realm of the
subjective satisfaction of the Assessing Officer. At this stage therefore, what
we have on record and emerging from the reasons recorded is that there is
strong prima facie material to suggest that the purchases shown to have been
made by the assessee from M/s. Shiyon Enterprises were bogus. The
investigation wing of the department had during the course of investigation in
case of Shri Chandrakant Patel found materials suggesting that he had
indulged in providing accommodation entries and bogus bills. This was
further supplemented by the fact that in the current account of M/s. Shiyon
Enterprises maintained at Jhaveri bazar branch of Union Bank of India,
cheques issued were preceded by substantial cash deposits in the account. The
assessee had also maintained bank account in the same branch of the same
bank. The assessee had claimed sizeable purchases from such entity during
the year under consideration.
7. In case of Yogendrakumar Gupta v. ITO, (2014) 366 ITR 186 (Guj.),
Division Bench of this Court had carried out detailed examination of legal
position in the background of somewhat similar facts and concluded as under:
“The Assessing Officer required jurisdiction to reopen under Section 147
read with Section 148 of the Act, where the information must be specific
and reliable. As held by the Apex Court in the case of Phul Chand
Bajrang (supra), since the belief is that of the Income-tax Officer, the
sufficiency of reasons for forming the belief, is not for the Court to judge
but is open to an assessee to establish that there exists no belief or that
the belief is not at all a bona fide one or based on vague, irrelevant and
non- specific information. To that limited extent, the Court may look at
the view taken by the Income-tax Officer and can examine whether any
material is available on record from which the requisite belief could be
formed by the Assessing Officer and whether that material has any
rational connection or a live link with the formation of the requisite
belief. It is also immaterial that at the time of making original
assessment, the Assessing Officer could have found by further inquiry or
investigation as to whether the transactions were genuine or not. If on the
basis of subsequent valid information, the Assessing Officer forms a
reason to believe on satisfying twin conditions prescribed under Section
147 of the Act that no full and true disclosure of facts was made by the
assessee at the time of original assessment and, therefore, the income
chargeable to tax had escaped assessment, his belief and the notice of
reassessment based on such belief/ opinion needs no interference.
In the present case, since both the necessary conditions have been duly
fulfilled, sufficiency of the reasons is not to be gone into by this Court.
The information furnished at the time of original assessment, when by
subsequent information received from the DCIT, Kolkata, itself found to
be controverted, the objection to the notice of reassessment under
Section 147 of the Act must fail. At the costs of ingemination, it needs to
be mentioned that at the time of scrutiny assessment, a specific query
was raised with regard to unsecured loans and advances received from
the said company namely, Basant Marketing Pvt. Ltd. based at Kolkata.
These being the transactions through the cheques and drafts, there would
arise no question of the Assessing Officer not accepting such version of
the assessee and not treating them as genuine loans and advances.
Furnishing the details of names, addresses, PANs, etc. also would lose its
relevance if subsequently furnished information, which has been made
basis for issuance of notice impugned, concludes that Basant Marketing
Pvt. Ltd. is merely a dummy company of one Shri Arun Dalmia, which
provided the accommodation entries to various beneficiaries.
This Court has examined the belief of the Assessing Officer to a limited
extent to inquiry as to whether there was sufficient material available on
record for the Assessing Officer to form a requisite belief whether there
was a live link existing of the material and the income chargeable to tax
that escaped assessment. This does not appear to be the case where the
Assessing Officer on vague or unspecific information initiated the
proceedings of reassessment, without bothering to form his own belief in
respect of such material. We need to notice that the Joint Director, CBI,
Mumbai, intimated to the DIT (Investigation), Mumbai. A case is
registered against Mr. Arun Dalmia, Harsh Dalmia and during the search
at their residence and office premises, the substantial material indicated
that 20 dummy companies of Mr. Arun Dalmia were engaged in money
laundering and the income-tax evasion. The said entities included Basant
Marketing Pvt. Ltd. also. From the analysis of details furnished and the
beneficiaries reflected, which are spread across the country, the CIT,
Koklata, suspected the accommodation entry related to the Assessment
Year 2006-07 as well, this information has been provided to Director
General of Income-tax, Kolkata, who in turn, communicated to the Chief
Commissioner of Income-tax, Ahmedabad. Further revelation of
investigation as could be noticed from the record examined (file)
deserves no reflection in this petition. Insistence on the part of the
petitioner to provide any further material forming the part of
investigation carried out against Dalmias also needs to meet with
negation, as the law requires supply of information on which Assessing
Officer recorded her satisfaction, without necessitating supply of any
specific documents. The proceedings initiated under Section 147 of the
Act would not be rendered void on non- supply of such document for
which confidentiality is claimed at this stage, following the decision of
the Delhi High Court in case of Acorus Unitech Wireless (P.)
Ltd. (supra). Assumption of jurisdiction on the part of the Assessing
Officer is since based on fresh information, specific and reliable and
otherwise sustainable under the law, challenge to reassessment
proceedings warrant no interference.
(2021) ABC 301
Resultantly, the petition is dismissed. Notice is discharged. There shall
be, however, no order as to costs.”
8. The fact that the assessee's sales and purchases came up for scrutiny
during the original assessment would be of no consequence since now the
Assessing Officer relies on material which was not part of the assessment
proceedings and which material was provided by the investigation wing
unearthed during the course of investigation in case of Shri Chandrakant
Patel.
9. In the result, the petition is dismissed. Rule is discharged. Interim relief,
if any stands vacated.
_____________
(2020) 8 ITJ Online 206 (Delhi)
In the High Court of Delhi
Revolution Forver Marketing Pvt. Ltd.
v.
Income Tax Officer
Shri S. Ravindra Bhat and Shri Prateek Jalan, JJ.
W.P. (C) No. 10857 of 2016
14th February, 2019
Reopening of Assessment U/s. 147 of the Income Tax Act,1961-Notice U/s.
148 of the Income Tax Act,1961-Notice Dated 03.03.2016 for A.Y. 2009-10-
Original Assessment being carried out under S.143(3) of the Income Tax
Act,1961-A multi-level marketing company which specialises in FMCG
products, transacts through various group companies/sister concerns, which
are tasked to perform specific work on territorial and other defined basis. Its
marketing model is dependent heavily upon cash receipts from consumers
who subscribe to its segments, as members at various levels. Being a cash
intensive transaction model, the business reflects deposits in the assessee's
accounts-that once the scrutiny assessment was complete, based upon all the
relevant material such as bank account statements, information vis.-a-vis
sundry creditors and answers to the queries given apparently to the
specification of the AO, the dredging of that material on the basis of
information and vague internet searches, did not constitute material
information, which was withheld from the Revenue at the stage of the return
filing. It was contended that the impugned re-assessment notice was preceded
by some investigation [as evident from para 4 of the re-assessment notice].
Learned Counsel faulted the notice for being open ended stating that para 4(c)
and the inferences drawn i.e. amount of Rs. 4.36 crores had escaped
assessment for assessment year in question, taking into consideration "credit
entries of the aggregate Rs. 72.10 crores and Rs. 14.78 crores cash deposit
since the opening of the above stated account on various dates", cannot
constitute fresh or tangible material justifying re-assessment-Held-that the
principal basis for reassessment appears to be the opinion of the Revenue that
substantial cash transactions were carried out, having regard to the date of
opening of the accounts, which were not verified. Now this Court is of the
opinion that this reason is vague. The duty of the assessee is to disclose the
bank statements for the relevant year, which it did. As to what inferences are
to be drawn for the previous years is not within the remit of the AO and
consequently of no relevance whatsoever at least in considering whether to
issue or not to issue reassessment notice, on just cash intensive transactions;
clearly, this reason is vague and unjustified.
Final outcome – Allowed

CIT v. Kelvinator of India Ltd., (2017) 3 ITJ Online 130 (SC) : (2010) 14
ITJ 189 : (2010) 320 ITR 561 : (2010) 228 CTR 488 : (2010) 187 Taxman
312 : (2010) 34 DTR 49 : (2011) 3 STD 6 : (2010) 2 SCC 723 [Refer Para 7]
CIT v. Lovely Exports (P.) Ltd., (2016) 2 ITJ Online 492 (SC) : (2012) 6 STD
677 : (2008) 216 CTR 195 : (2008) 6 DTR 308 : (2008) 11 ITJ 357 : (2010)
14 SCC 761 [Refer Para 7]
Counsel :
– S. Krishnan and Ms. Sujata Kashyap, Advs., for the Petitioner;
– Ajit Sharma, Adv., for the Respondent.
ORDER
Shri S. Ravindra Bhat, J. :
1. The petitioner is aggrieved by the impugned notice dated 30.03.2016,
under Section 147/148 proposing to re-assess its income for A.Y.2009-10. It
contends that all information necessary for computation of income was
provided in the returns and that taking them into consideration the AO framed
the scrutiny assessment under Section 143(3) on 30.11.2011.
2. The relevant parts of the impugned re-assessment notice reads as
follows:
“Information was received from ITO (investigation) Unit-2 New Delhi
vide letter F.No.ITO(Inv.)/U-2/S-56/2015-16/ 307 dated 28.03.2016. The
contents of the letter are as under:
2. During the course of investigation on a STR No.1000062089 (UIN
120718442) in the case of M/s AVS Mann and CO, K-11, 1st Floor,
Rajouri Garden, New Delhi-110027 received in this office.
3. In the dissemination note it has been stated that "The bank has
identified an account no.207010200013439 in the name of Revolution
(2021) ABC 303
Forever Mkt. Wherein, frequent intersol cash deposites. Transfers and
clearing are seen. The total turnover of the account since account
opening is over Rs.72.10 crores. Out of total credit Rs.14.78 crores are in
form of cash, as declared by the customer, company is trading in FMCG
products in line of MLM model. On scrutiny over internet it was
observed that the said company hold a website in the name of
http://www.revolutionforever.com. On perusing the company website,
various offers/schemes resembling of MLM companies are there
business plan can generate unlimited income. Mr.Gurjeet
Singh/Mr.Mann Ramanjeet/Mr.Abhishek Johri/Mr.Davinder
Singh/Mr.Mukesh Kumar Sharma authorised signatory of Revolution
Forever Mkt. Ltd. Mr.Gurjeet Singh is a common authorised for 9
current account no.035010200026895, 207010200007931 &
106010200016010 (REVOLUTION FOREVER MKT. LTD.),
207010200014261 (MARG LIFE CARE AND FINANCIAL
PRODUCTS PRIVATE LIMITED), 20701020000731 (REVOLUTION
FOREVER TECHNOLOGIES), 910020031920816 (A. V. S. MANN
AND CO. (HUF)), 910020047999532 (JIVA ANDEEP ENTERPRISE)
and 207010200013129 (VENUS LIFE CARE), wherein Bank and
observed high value transfer credits followed by clearing and transfer
debits. Instances of case deposits and withdrawals are also observed.
Mr.Gurjeet Singh also mainrains two saving bank accounts no.
207010100295482 and 040010100218085, wherein High value transfer
and RTGS credits following by transfer and RTGS debits are seen.
Mr.Davinder Singh maintains a saving bank account
no.207010100299718, wherein transfer from main account and clearing
debit are observed. There are transfer transactions between Account of
Revolution Forever Mkt. Ltd. and various account herein mentioned as
related account. There is a trend of transfers from main account and
clearing credits following by cash withdrawals and clearing debit in all
the related accounts. Based on the nature of transactions resembling of
MLM activity and internet findings, intent of the customer is suspicious."
4. From the replies/submissions made by ARs of the assessee during the
investigation proceedings viz-a-viz allegation made in the STR, the
following points emerges:-
(a) In the STR the bank identified on account no. 20701020013439
maintained with Axis Bank Ltd. C-3/21, Janakpuri, Delhi-58 which
belongs to M/s Revolution Forever Marketing Pvt. Ltd. which is the
main company having various office maintained by different entities at
different locations. The main business of the company is to do online
marketing and supply of goods through its various representatives, firms
from different locations.
(b) M/s Revolution Forever Marketing Pvt. Ltd. has following parties
with whom it deals during the whole process (whose name also reflects
in the STR). Further, the assessee has submitted all the bank accounts:–
(i) M/s Marg Life Care and Financial Products Pvt. Ltd.
(ii) M/s AVS Mann & Co.HUF
(i) M/s Revo Life care
(ii) M/s J.S.Technologies,
(iii) M/s Jivandeep Enterprise.
(iv) M/s Venus Life Care.
(v) Mr.Manoj Kumar Rai.
(vi) Sh.Ranjit Kumar Bhardwaj.
(vii) Sh.Amod Kumar.
(c) With regard to credit entries of aggregate Rs.72.10 Crores and
Rs.14.78 crore cash deposited since the opening of above stated bank
account on various dates remained unverified during the F.Y.2008-09.
Further, assessee has shown his turnover amounting to Rs.4.36 crores
which does not match with the bank accounts maintained by the
Company during the F.Y. 2008-09.
Keeping in view of above facts and circumstances, I have reason to
believe that an amount at least Rs.4.36 crore has escaped assessment in
the case of Ms Revolution Forever Marketing (P) Ltd. for the A.Y.2009-
10, within the meaning of of section 147/148 of the Income Tax Act,
1961.”
3. It is contended that the assessee, a multi-level marketing company which
specialises in FMCG products, transacts through various group
companies/sister concerns, which are tasked to perform specific work on
territorial and other defined basis. Its marketing model is dependent heavily
upon cash receipts from consumers who subscribe to its segments, as
members at various levels. Being a cash intensive transaction model, the
business reflects deposits in the assessee's accounts.
4. Mr.S.Krishnan, Learned Counsel for the petitioner contends on behalf of
the petitioner that once the scrutiny assessment was complete, based upon all
the relevant material such as bank account statements, information vis.-a-vis
sundry creditors and answers to the queries given apparently to the
specification of the AO, the dredging of that material on the basis of
information and vague internet searches, did not constitute material
information, which was withheld from the Revenue at the stage of the return
filing. It was contended that the impugned re-assessment notice was preceded
by some investigation [as evident from para 4 of the re-assessment notice].
Learned Counsel faulted the notice for being open ended stating that para 4(c)
and the inferences drawn i.e. amount of Rs. 4.36 crores had escaped
assessment for assessment year in question, taking into consideration "credit
(2021) ABC 305
entries of the aggregate Rs. 72.10 crores and Rs. 14.78 crores cash deposit
since the opening of the above stated account on various dates", cannot
constitute fresh or tangible material justifying re-assessment.
5. Learned Counsel for the Revenue resisted the petition and urged that the
re-assessment was not based upon appraisal of the material by the AO but
rather on the intimation received from the investigation wing, which had
carried out inquiry into assessee's accounts and affairs. It was submitted that
the investigation report - which was quoted in material parts in the
reassessment notice in the present case had clearly stated that income to the
extent of Rs. 4.36 crores, at least, was remitted to have escaped assessment for
A.Y. 2009-10.
6. The counter affidavit filed by the respondent/Revenue in the present case
does not dispute that the petitioner had undergone scrutiny assessment in the
first instance. The AO on that occasion satisfied herself/himself as to the
veracity of the statements made and even that the relevant particulars relating
to the bank accounts [together with the account statements for the concerned
year] and all entries had been furnished. Furthermore, the AO was also aware
of the fact that the assessee was engaged in multi-level marketing business
model, which is dependent on cash intensive transactions that in turn leads to
deposit of cash on daily basis in high volume. The material on record - the
balance sheets filed along with the return disclosed the bank accounts and its
particulars. The assessee had by a letter dated 19.09.2011 replied to various
queries addressed to it by the AO in reply to the notice in the course of
scrutiny proceedings. These include letters of confirmation from major sundry
trade creditors, list of purchases from sundry trade creditors of value of more
than Rs.1 lakh, list of sundry creditors other than trade creditors; TDS
Deduction Registers relating to distributors' incentives, statement of rent and
TDS and all detailed statements of accounts of the company. Consequently in
the opinion of the Court this is a disclosure of all related material of fact.
7. The law relating to the reopening of assessment is well settled unless the
AO is satisfied that in the original assessment, including scrutiny assessment,
disclosure of relevant material facts were not made or if some new materials
subsequently lead the AO to believe that income has escaped assessment,
reassessment is justified. As to what constitutes 'new material', this is now
well settled by the judgment of the Supreme Court in CIT v. Kelvinator of
India Ltd., (2017) 3 ITJ Online 130 (SC) : (2010) 14 ITJ 189 : (2010) 320
ITR 561 : (2010) 228 CTR 488 : (2010) 187 Taxman 312 : (2010) 34 DTR
49 : (2011) 3 STD 6 : (2010) 2 SCC 723. With respect to what are the duties
of the assessee, with respect to cash deposits, the law is also well settled. The
ruling in CIT v. Lovely Exports (P.) Ltd., (2016) 2 ITJ Online 492 (SC) :
(2012) 6 STD 677 : (2008) 216 CTR 195 : (2008) 6 DTR 308 : (2008) 11 ITJ
357 : (2010) 14 SCC 761 affirmed previous ruling of this Court. The primary
duty is upon the assessee to disclose material facts relating to share
application amounts, credits claimed etc. In the present case, the details of all
sundry creditors were disclosed; the nature of business transactions by cash
intensive transaction, all bank statements were also furnished in the original
assessment. In case the AO was not satisfied, he ought to have made further
inquiries seeking confirmations in respect of particular entries. In the present
case, no such inquiry was made. The failure of the Revenue in that regard
does not clothe it with the power to carry out reassessment under Section
147/148.
8. This Court is also of the opinion that the principal basis for reassessment
appears to be the opinion of the Revenue that substantial cash transactions
were carried out, having regard to the date of opening of the accounts, which
were not verified. Now this Court is of the opinion that this reason is vague.
The duty of the assessee is to disclose the bank statements for the relevant
year, which it did. As to what inferences are to be drawn for the previous
years is not within the remit of the AO and consequently of no relevance
whatsoever at least in considering whether to issue or not to issue
reassessment notice, on just cash intensive transactions; clearly, this reason is
vague and unjustified.
9. In view of the foregoing reasons the impugned assessment notice and all
consequential proceedings are hereby quashed.
10. The writ petition is allowed in the above terms.
_____________
(2016) 2 ITJ Online 930 (Guj)
Peass Industrial Engineers Pvt. Ltd.
v.
Shri Akil Kureshi and Shri A.J. Shastri, JJ.
05th August, 2016
Reopening of Assessment-S.147 of the Income Tax Act,1961-Notice U/s. 148
of IT Act,1961-Notice Dated 31.03.2015-Original Assessment U/s. 143(3) of
Income Tax Act,1961-that there is a reasonable belief of the authority that
income chargeable to tax had escaped the assessment and thereby, asked the
petitioner to submit the return in the prescribed form within 30 days. The
petitioner under a letter dated 25.04.2015 submitted before the authority that
return of the petitioner company had been thoroughly scrutinized and scrutiny
assessment order also came to be passed and in the said letter, the petitioner
has asked for the reasons which have been recorded while issuing notice
under Section 148 of the Act so as to see that effective return of income can
be submitted to apply the notice. In response to the notice of reassessment,
petitioner filed its return on 28.04.2015 and under a letter dated 10.08.2015,
the authority has submitted the copy of reasons which have been recorded and
(2021) ABC 307
simultaneously, served notices under Sections 143(2) and 142(1) of the Act.
The petitioner pursuant to it submitted the objection under a letter dated
24.08.2015, inter-alia, contending that the petitioner has fully and truly
disclosed all material facts necessary for assessment and there is no failure on
its part to do so. It was also contended that Investigating Wing has
mechanically reproduced the reasons for reopening for the assessment which
has been thoroughly scrutinized culminating into final scrutiny assessment
order and therefore, it is the case of the petitioner while submitting objection
that reopening under Section 148 of the Act is impermissible. Said letter of
objection submitted by the petitioner came to be examined by the authority
and vide order dated 21.01.2016, the authority, after considering the reasons
which have been recorded as well as after considering the submissions made
by the petitioner in its letter of objection, came to the conclusion that
objections are not sustainable and therefore, rejected the same vide letter
stated above. It is in this background of fact the petitioner has invoked
extraordinary jurisdiction of this Court under Article 226 of the Constitution
of India for challenging the legality and validity of the issuance of notice
under Section 148 of the Act as also the order of rejection of objections
submitted by the petitioner-Held-Considering the aforesaid situation
prevailing on record, it appears to this Court that the background of facts
demand reopening of assessment and the authority is justified in issuing
notice under Section 148 of the Act and the reasons based upon it are
sufficient enough to permit the authority to exercise jurisdiction to reopen the
assessment. Even from bare reading of the order rejecting the objections also,
appear to this Court cogent enough as supported by valid reasons. The same is
also not required to be interfered with. Hence, the present petition deserves to
be dismissed and accordingly, it is dismissed

AGR Investment Ltd. v. Additional Commissioner of Income Tax and anr,
(2016) 1 ITJ Online 803 (Delhi) : (2011) 333 ITR 146 : (2011) 239 CTR
378 : (2011) 197 Taxman 177 [Refer Para 10]
Anant Kumar Sahariav. CIT, (2016) 1 ITJ Online 805 (GH) [Refer Para 10]
Asstt. Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers P.
Limited,, (2016) 2 ITJ Online 289 (SC) : (2007) 9 ITJ 85 : (2014) 10 STD
602 : (2007) 291 ITR 500 : (2007) 210 CTR 30 : (2007) 161 Taxman 316 :
(2008) 14 SCC 208 [Refer Para 9]
Bombay Pharma Products v. ITO, (2016) 2 ITJ Online 16 (MP) : (2007) 7
[Refer Para 10]
Central Provinces Manganese Ore Co. Ltd. v. ITO, (2016) 1 ITJ Online 808
(SC) : (1991) 191 ITR 662 : (1991) 98 CTR 161 : (1991) 59 Taxman 17
[Refer Para 9]
GKN Driveshafts (India) Ltd. v. ITO, (2016) 1 ITJ Online 817 (SC) : (2003)
ITO v. Selected Dalurband Coal Co. Pvt. Ltd., (1996) 217 ITR 597 (SC)
[Refer Para 9]
Phool Chand Bajrang Lal v. ITO, (2016) 1 ITJ Online 825 (SC) : (1993) 203
ITR 456 : (1993) 113 CTR 436 : (1993) 69 Taxman 627 : (1993) 4 SCC 77
[Refer Para 10]
Principal CIT v. Gokal Ceramics, (2016) 289 CTR 126 (Guj.) : (2016) 241
Raymond Wollen Mills Ltd. v. ITO, (2016) 2 ITJ Online 811 (SC) : (1999)
236 ITR 34 : (1999) 152 CTR 418 [Refer Para 9]
Sarthak Securities Co. Pvt. Ltd. v. ITO, (2016) 1 ITJ Online 827 (Delhi) :
(2010) 329 ITR 110 : (2010) 236 CTR 362 : (2010) 195 Taxman 262 [Refer
Para 10]
Counsel :
– Manish J. Shah, Adv., for the Appellant;
– Sudhir M. Mehta, Adv., for the Respondent.
Equivalent Citation : (2016) 289 ITR 139 (Gujarat) : (2018) 100
Taxman.com 381 (Gujarat)
JUDGMENT
Shri A.J. Shastri, J. :
1. The present petition contains a challenge to the legality and validity of the
notice dated 31.3.2015 issued by the authority under Section 148 of the
Income Tax Act, 1961 (for short ‘the Act’) as also an order dated 21.01.2016
passed by the authority rejecting the objections filed by the petitioner.
2. Brief facts leading to the petition are summarized as under:
2.1 The petitioner is a limited company doing the business of manufacturing
winding machines including cone winders, precision winders and versa
winders and the petitioner is an Income Tax assessee has submitted return of
income for the Assessment Year 2012-13 declaring total income of Rs.
4,80,87,320/- along with Tax Audit Report and Form Nos. 3(c)(a) as also 3(c)
(d) along with audited financial statement. The petitioner company received a
notice under Section 143(2) of the Act dated 23.09.2013 and also received
another notice under Section 142(1) dated 27.11.2014 along with
questionnaire running into 20 questions calling for varied information.
2.2 The petitioner under a letter dated 12.12.2014 supplied the details called
for by the respondent authority and extensive scrutiny is undertaken by the
(2021) ABC 309
authority and in the said scrutiny assessment, an assessment order under
Section 143(3) of the Act dated 03.10.2013 came to be passed accepting the
total income written by the petitioner.
3. It is the case of the petitioner that subsequently, the petitioner received a
notice under Section 148 of the Act dated 31.03.2015, inter-alia, stating that
there is a reasonable belief of the authority that income chargeable to tax had
escaped the assessment and thereby, asked the petitioner to submit the return
in the prescribed form within 30 days. The petitioner under a letter dated
25.04.2015 submitted before the authority that return of the petitioner
company had been thoroughly scrutinized and scrutiny assessment order also
came to be passed and in the said letter, the petitioner has asked for the
reasons which have been recorded while issuing notice under Section 148 of
the Act so as to see that effective return of income can be submitted to apply
the notice. In response to the notice of reassessment, petitioner filed its return
on 28.04.2015 and under a letter dated 10.08.2015, the authority has
submitted the copy of reasons which have been recorded and simultaneously,
served notices under Sections 143(2) and 142(1) of the Act. The petitioner
pursuant to it submitted the objection under a letter dated 24.08.2015, inter-
alia, contending that the petitioner has fully and truly disclosed all material
facts necessary for assessment and there is no failure on its part to do so. It
was also contended that Investigating Wing has mechanically reproduced the
reasons for reopening for the assessment which has been thoroughly
scrutinized culminating into final scrutiny assessment order and therefore, it is
the case of the petitioner while submitting objection that reopening under
Section 148 of the Act is impermissible. Said letter of objection submitted by
the petitioner came to be examined by the authority and vide order dated
21.01.2016, the authority, after considering the reasons which have been
recorded as well as after considering the submissions made by the petitioner
in its letter of objection, came to the conclusion that objections are not
sustainable and therefore, rejected the same vide letter stated above. It is in
this background of fact the petitioner has invoked extraordinary jurisdiction of
this Court under Article 226 of the Constitution of India for challenging the
legality and validity of the issuance of notice under Section 148 of the Act as
also the order of rejection of objections submitted by the petitioner.
4. In the background of aforesaid fact, Mr. M.J. Shah, learned Counsel
appearing on behalf of the petitioner has submitted that notice for reopening
served upon the petitioner is submitted after scrutiny assessment wherein, the
petitioner has fully and truly disclosed all material relevant to the assessment
and therefore, in view of the fact that once the scrutiny assessment has been
undertaken, it is not open for the authority to re-examine by reopening the
assessment. Learned counsel also contended before the Court that to arrive at
a reasonable belief the reasons which are recorded are not valid reasons and
there reflects no independent satisfaction arrived at by the authority. It is
merely on the basis of some third party information, the authority has come to
the conclusion that assessment which has become final deserves to be
reopened and therefore, for forming a belief of reopening, no independent
application of mind is reflecting. Learned counsel further submitted that TDS
which has been deducted on the payments made and also the address,
permanent account number and the amount of commission given to the party
have been submitted before the Income Tax Department at the time of
previous scrutiny assessment and those materials have been examined in
detail by the Assessing Officer and only thereafter, the scrutiny assessment
culminated finally. It is in this background, learned counsel for the petitioner
submitted that the information received by some another agency can never be
a subject matter of reopening of assessment once having been finalized.
Learned counsel also submitted that the order passed by the respondent
authority rejecting the objections of the petitioner is also not in the right spirit
nor in consonance with the decision GKN Driveshafts (India) Ltd. v. ITO,
(2016) 1 ITJ Online 817 (SC) : (2003) 259 ITR 19 : (2003) 179 CTR 11 :
(2002) 125 Taxman 963 and thereby, has submitted that reopening is not
warranted. Learned counsel further submitted that if the executing authority is
acting without jurisdiction or acting in a manner in which it is not permissible
then, the High Court has ample power irrespective of alternative remedy to
invoke extraordinary jurisdiction and to prohibit the authority from acting in
the manner not in consonance with the law and thereby, requested the Court
not to permit reopening of assessment once same has become final. No other
submissions have been made. However, ultimately learned counsel for the
petitioner submitted to set aside the impugned order rejecting the objections
as well as notice issued under Section 148 of the Act.
5. As against this, Mr. Sudhir Mehta, learned Counsel appearing on behalf of
the Revenue has submitted that the authority is justified in reopening the
assessment of the petitioner. The Assessing Authority, while issuing the
notice under Section 148 of the Act, has enough material to substantiate the
reopening and for forming a reasonable belief that income has escaped the
assessment. It was submitted by learned counsel that a specific information
has been received by the DGIT (Investigation), Ahmedabad on 26.03.2015
wherein, it is stated that two surveys were carried out by the I/o. Pr. DIT
(Inv.) Kolkata on Vikrant Kayan and Arvind Kayan respectively and these
Kayans were well known entry operators of Kolkata and have been indulging
in entries of bogus share capital, bogus bill of expenses and bogus long term
capital gain and the authority having realized this found live link, prima facie
has opined that income of the petitioner has escaped assessment and therefore,
such reasonable belief based upon justifiable material, cannot be examined in
writ jurisdiction. Learned Counsel for the Revenue submitted that for forming
an opinion and to come to a reasonable belief, the Assessing Officer is not
ascertaining finally the fact of legal evidence or conclusion. The function of
the Assessing Officer is to administer the statute with solicitude for the public
exchange with an inbuilt idea of fairness to tax payer as well and therefore, at
the initial stage, what is required is reason to believe but, not established fact
of escapement of income and therefore, at this stage of issuance of notice,
(2021) ABC 311
only question to be dealt with by Assessing Authority is whether there is any
relevant material on which a reasonable person could have formed a
reasonable belief and therefore, since this is merely a stage where a
reasonable belief is formed, the authority may not be allowed to be
intercepted in exercise of its statutory function and thereby learned counsel
for the Revenue submitted that no interference be made in exercise of writ
jurisdiction.
6. Having heard learned Counsel appearing for the respective parties, before
dealing with the submissions made before the Court, first and foremost
consideration to deal with is as to whether a reasonable belief formed by the
authority is based upon some material or not. To deal with this, we may
reproduce the reasons which are recorded by the authority while issuing
notice under Section 148 of the Act. Relevant extract of the said reasons read
as under :–
"3. The assessee is engaged in the business of manufacturing of textile
machinery and spare parts. The assessee has filed his return of income on
04.02.2014 declaring total income at Rs. 4,80,87,320/-. The case was
selected for scrutiny and assessment was completed u/s. 143(2) dated
23.02.2015 accepting return of income.
4. In this case, information has been received by DGIT (Investigation),
Ahmedabad vide No. DGIT(Inv.)/AHD/VAT/Bogus Purchase/2014-15
dated 26.03.2015. It is stated in the letter that two surveys were carried
out by the Pr. DIT (Inv.) Kolkata on Vikrant Kayan and Arvind Kayan
respectively. The Kayans are known entry operators of Kolkata and have
been giving entries of bogus share capital, bogus bills of expenses and
bogus long term capital gains to various beneficiaries through out the
country. The above mentioned assessee is also a beneficiary of Rs.
181,93 lacs (accommodating co. Tafford Fleur Pvt. Ltd.) pertaining to
A.Y. 2012-13.
5. Considering the facts stated above, I have reason to believe that the
income “
7. Perusal of the said reasons postulate that an information has been received
by DGIT (Inv.) branch of Ahmedabad about bogus purchases wherein, it has
been emerged that two survey operations were carried out by the competent
authority, Kolkata in case of Vikrant Kayan and Arvind Kayan and the
information which has been gathered is that these Kayans are well known
entry operators of Kolkata and have been giving entires of bogus share
capital, bogus billing entries pertaining and bogus long term capital gains to
various beneficiaries across the country and it has been revealed in the said
information that this very assessee i.e. present petitioner is also a beneficiary
of such entry operation of Kayans to the extent of Rs. 127.94 lacs
(accommodating co. Agnes Bruno Ltd.) pertaining to A.Y. 2008-09 and based
upon this material, the authority has issued notice under Section 148 of the
Act for reopening of assessment as from the material, the authority found that
there is a reasonable belief that income of the petitioner - assessee has escaped
assessment and therefore, it is justified to reopen the assessment.
8. It is also emerging from the order passed by the authority rejecting the
objections submitted by the petitioner dated 21.01.2016 that each and every
material submitted by the petitioner has been extensively dealt with and a
detailed order came to be passed and the said order is supported by cogent
reasons, the decision arrived at to reopen the assessment appears to be just
and proper. From the material available, the authority prima facie found that
petitioner - assessee is also the beneficiary of those Kayans brothers, who are
well known entry operators across the country and to the extent of sizable
amount, the petitioner has also been benefited and this part of the income
appears to have been escaped assessment in the belief of the authority, the
said belief cannot intercepted by exercising extraordinary jurisdiction of this
Court under Article 226 of the Constitution of India.
9. In the background of aforesaid circumstance available and reflected on
record, it appears to this Court that the authority has applied its mind and has
rightly relied upon the information available before it while exercising the
power to reopen the assessment. We may recall the proposition of law on the
issue in question in a well known decision of Apex Court in case of Asstt.
Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers P. Limited,,
(2016) 2 ITJ Online 289 (SC) : (2007) 9 ITJ 85 : (2014) 10 STD 602 : (2007)
291 ITR 500 : (2007) 210 CTR 30 : (2007) 161 Taxman 316 : (2008) 14 SCC
208. The Apex Court, dealing with the said case, has dealt with statutory
provisions prior to amendment as well as post amendment and after analyzing
the provisions of Sections 147 and 148 of the Act, the Apex Court has opined
that Section 147 authorizes and permits the Assessing Officer to assess or re-
assess the income chargeable to tax if he has reason to believe that income for
any assessment year as escaped the assessment. The word ‘reason’ in the
phrase ‘reason to believe’ would mean cause or justification and after
considering and analyzing the provision, it has been propounded that the
expression cannot be read to mean that Assessing Officer should have finally
ascertained the fact of legal evidence or conclusion. At the initial stage what
is required is reason to believe but, not established fact of escapement of
income and therefore, at this stage only question whether there was relevant
material to form a reasonable belief is to be seen and in the background of
present facts, there is a specific information received about the Kayans
brothers during investigation by the authority and it has been prima facie
found that present petitioner - assessee is also the beneficiary of the said
Kayan brothers. At this stage of the proceeding, the factum of said aspect
whether the petitioner is beneficiary or not, is not to be finally adjudicated
upon by the Assessing Officer and therefore, this Court is not in a position to
dwell into it but, only has to examine whether there is a reasonable belief
arrived at or not and from the basis of aforesaid circumstance prevailing on
record, it appears that the Assessing Officer is justified prima facie in arriving
at conclusion to reopen the assessment. A liberty is always available to the
(2021) ABC 313
petitioner to justify or to deal with the same, but this is not the stage where the
process of reopening based upon aforesaid material is to be intercepted. The
relevant extract contained in the said decision of the Apex Court is
reproduced hereinafter :–
“16. Section 147 authorises and permits the Assessing Officer to assess
or reassess income chargeable to tax if he has reason to believe that
income for any assessment year has escaped assessment. The word
reason in the phrase reason to believe would mean cause or justification.
If the Assessing Officer has cause or justification to know or suppose
that income had escaped assessment, it can be said to have reason to
believe that an income had escaped assessment. The expression cannot
be read to mean that the Assessing Officer should have finally
ascertained the fact by legal evidence or conclusion. The function of the
Assessing Officer is to administer the statute with solicitude for the
public exchequer with an inbuilt idea of fairness to taxpayers. As
observed by the Delhi High Court in Central Provinces Manganese Ore
Co. Ltd. v. ITO, (2016) 1 ITJ Online 808 (SC) : (1991) 191 ITR 662 :
(1991) 98 CTR 161 : (1991) 59 Taxman 17, for initiation of action under
Section 147(a) (as the provision stood at the relevant time) fulfillment of
the two requisite conditions in that regard is essential. At that stage, the
final outcome of the proceeding is not relevant. In other words, at the
initiation stage, what is required is reason to believe, but not the
established fact of escapement of income. At the stage of issue of notice,
the only question is whether there was relevant material on which a
reasonable person could have formed a requisite belief. Whether the
materials would conclusively prove the escapement is not the concern at
that stage. This is so because the formation of belief by the Assessing
Officer is within the realm of subjective satisfaction (see ITO v. Selected
Dalurband Coal Co. Pvt. Ltd., (1996) 217 ITR 597 (SC) ; Raymond
Wollen Mills Ltd. v. ITO, (2016) 2 ITJ Online 811 (SC) : (1999) 236 ITR
34 : (1999) 152 CTR 418.
17. The scope and effect of Section 147 as substituted with effect from
April 1, 1989, as also Sections 148 to 152are substantially different from
the provisions as they stood prior to such substitution. Under the old
provisions of Section 147, separate clauses (a) and (b) laid down the
circumstances under which income escaping assessment for the past
assessment years could be assessed or reassessed. To confer jurisdiction
under Section 147(a) two conditions were required to be satisfied firstly
the Assessing Officer must have reason to believe that income profits or
gains chargeable to income tax have escaped assessment, and secondly
he must also have reason to believe that such escapement has occurred
by reason of either (i) omission or failure on the part of the assessee to
disclose fully or truly all material facts necessary for his assessment of
that year. Both these conditions were conditions precedent to be satisfied
before the Assessing Officer could have jurisdiction to issue notice under
Section 148read with Section 147(a) But under the substituted section
147 existence of only the first condition suffices. In other words if the
Assessing Officer for whatever reason has reason to believe that income
has escaped assessment it confers jurisdiction to reopen the assessment.
It is however to be noted that both the conditions must be fulfilled if the
case falls within the ambit of the proviso to Section 147. The case at
hand is covered by the main provision and not the proviso.
18. So long as the ingredients of section 147 are fulfilled, the Assessing
Officer is free to initiate proceeding under section 147 and failure to take
steps under section 143(3) will not render the Assessing Officer
powerless to initiate reassessment proceedings even when intimation
under section 143(1) had been issued.”
10. In another case recently being dealt with by this Court in Principal CIT v.
Gokal Ceramics, (2016) 289 CTR 126 (Guj.) : (2016) 241 Taxman 1and allied
matters wherein, very issue whether at the instance of same material of
another wing, whether reopening is permissible or not. While dealing with
said issue this Court has examined the said aspect and has come to the
conclusion that reopening is permissible. In the said group of appeals, the
substantial question of law posed before the Court, whether the ITAT was
justified in setting aside the reassessment orders on the ground that reopening
of assessment under Section 147 of the Act was bad in law. In that particular
group of matters, the reopening was admitted by the authority based upon the
show cause notice along with accompanied material forwarded by the Excise
Department to the Income Tax Department and on the basis of said material
provided by the Excise Department, the Assessing Officer has reopened the
assessment of the assessee by issuing notice under Section 148 of the Act.
The assessee of that case in the similar manner in this case has contended that
the information provided by a different Investigating Team may not be ipso
facto utilized to re open the assessment which has become final by the Income
Tax authority. It was also contended by the assessee of that case that there
was no independent application of mind on the part of Assessing Officer and
just based upon said information provided by the Excise Department, the
authority resorted to Section 148 of the Act to reopen the assessment. This
issue in extenso dealt with by the Division Bench of this Court and by a
detailed judgment, came to conclusion that the Assessing Officer has merely
relied upon the show cause notice issued by the Excise Department and has
not concluded finally and therefore, there is no illegality or irregularity in
arriving at a belief that assessment deserves to be reopen. Relying upon the
decision delivered by the Apex Court, it is held that action of reopening of
assessment was found to be justified. Relevant Paragraph Nos. 9, 10, 11, 12,
13 and 16 of the said decision worth to be taken note of and therefore,
reproduced hereinbelow :–
“9. It can thus be seen that the entire material collected by the DGCEI
during the search, which included incriminating documents and other
(2021) ABC 315
such relevant materials, was along with report and show-cause notice
placed at the disposal of the Assessing Officer. These materials prima
facie suggested suppression of sale consideration of the tiles
manufactured by the assessee to evade excise duty. On the basis of such
material, the Assessing Officer also formed a belief that income
chargeable to tax had also escaped assessment. When thus the Assessing
officer had such material available with him which he perused,
considered, applied his mind and recorded the finding of belief that
income chargeable to tax had escaped assessment, the re-opening could
not and should not have been declared as invalid, on the ground that he
proceeded on the show-cause notice issued by the Excise Department
which had yet not culminated into final order. At this stage the Assessing
Officer was not required to hold conclusively that additions invariably be
made. He truly had to form a bona fide belief that income had escaped
assessment. In this context, we may refer to various decisions cited by
the counsel for the Revenue.
10. In case of Central Provinces Manganese Ore Co. Ltd. v. Income Tax
Officer, Nagpur (supra) the Supreme Court noted that in case of the
assessee which had an office in London, this Customs authority had
come to know that the assessee had declared very low price in respect of
the consignment of Manganese exported by them out of India. After due
inquiries and investigations, the Customs authorities found that the
assessee was systematically under-voicing the value of Manganese as
compared with the prevailing market price. The Income Tax Officer on
coming to know about the proceedings before the Customs Collector in
this respect issued notice for reopening of the assessment. In the reasons
that the Assessing Officer relied on the facts as found by the Customs
Authorities that the assessee had under-voiced goods during export.
Under such circumstances, upholding the validity of the notice for
reopening, the Supreme Court held and observed as under:
‘So far as the first condition is concerned, the Income Tax Officer, in his
recorded reasons, has relied upon the fact as found by the Customs
Authorities that the appellant had under invoiced the goods it exported. It
is not doubt correct that the said finding may not be binding upon the
income tax authorities but it can be a valid reason to believe that the
chargeable income has been under assessed. The final outcome of the
proceedings is not relevant. What is relevant is the existence of reasons
to make the Income Tax Officer believe that there has been under
assessment of the assessee’s income for a particular year. We are
satisfied that the first condition to invoke the jurisdiction of the Income
Tax Officer under Section 147(a) of the Act was satisfied.’
11. In case of Income Tax Officer v. Purushottam Das Bangur, after
completion of assessment in case of the assessee, the Assessing Officer
received letter from Directorate of Investigation giving detailed
particulars collected from Bombay Stock Exchange which revealed
earning of share and price of share increased during period in question
and quotation appearing at Calcutta Stock Exchange was as a result of
manipulated transaction. On the basis of such information, the Assessing
Officer issued notice for reopening of the assessment. The question,
therefore, arose whether the information contained in the letter of
Directorate of Investigation could be said to be definite information and
the Assessing Officer could act upon such information for taking action
under Section 147(b) of the Act. In such background, the Supreme Court
observed as under:
‘12. Ms. Gauri Rastogi, the learned appearing for the respondents, has
urged that the letter of Shri Bagai was received by the Income tax
Officer on March 26, 1974 and on the very next day, that is, on March
27, 1974, he issued the impugned notice under Section 147(b) of the Act
and that he did not have conducted any inquiry or investigation into the
information sent by Shri Bagai. Merely because the impugned notice was
sent on the next day after receipt of the letter of Shri Bagai does not
mean that the Income Tax Officer did not apply his mind to the
information contained in the said letter of Shri Bagai. On the basis of the
said facts and information contained in the said letter, the Income Tax
officer, without any further investigation, could have formed the opinion
that there was reason to believe that the income of the assessee
chargeable to tax had escaped assessment. The High Court, in our
opinion, was in error in proceeding on the basis that it could not be said
that the Income Tax Officer had in his possession information on the
basis of which he could have reasons to believe that income of the
assessee chargeable to tax had escaped assessment for the relevant
assessment years. For the reasons aforementioned, we are unable to
uphold the impugned judgment of the High Court. The appeal is,
therefore, allowed, the impugned judgment of the High Court is set aside
and the Writ Petitions filed by the respondents are dismissed. No order
as to costs.’
12. In case of Income Tax Officer v. Selected Dalurband Coal Co. Pvt.
Ltd., (supra), the assessment was reopened on the basis of the
information contained in letter from Chief Mining Officer that the
colliery of the assessee had been inspected and there had been under
reporting of coal raised. Upholding the validity of reopening of
assessment, the Supreme Court held and observed as under:
‘After hearing the learned counsel for the parties at length, we are of the
opinion that we cannot say that the letter aforesaid does not constitute
relevant material or that on that basis, the Income Tax Officer could not
have reasonably formed the requisite belief. The letter shows that a joint
inspection was conducted in the colliery of the respondent on January
9,1967, by the officers of the Mining Department in the presence of the
(2021) ABC 317
representatives of the assessee and according to the opinion of the
officers of the Mining Department, there was under reporting of the
raising figure to the extent indicated in the said letter. The report is made
by a Government Department and that too after conducting a joint
inspection. It gives a reasonably specific estimate of the excessive coal
mining said to have been done by the respondent over and above the
figure disclosed by it in its returns. Whether the facts stated in the letter
are true or not is not the concern at this stage. It may be well be that the
assessee may be able to establish that the facts stated in the said letter are
not true but that conclusion can be arrived at only after making the
necessary enquiry. At the stage of the issuance of the notice, the only
question is whether there was relevant material, as stated above, on
which a reasonable person could have formed the requisite belief. Since
we are unable to say that the said letter could not have constituted the
basis for forming such a belief, it cannot be said that the issuance of
notice was invalid. Inasmuch as, as a result of our order, the
reassessment proceedings have not to go on we don not and we ought not
to express any opinion on the merits.’
13. In case of AGR Investment Ltd. v. Additional Commissioner of
Income Tax and anr, (2016) 1 ITJ Online 803 (Delhi) : (2011) 333 ITR
146 : (2011) 239 CTR 378 : (2011) 197 Taxman 177, a Division Bench
of Delhi High Court considered the validity of reopening of assessment
where the notice was based on information received from Directorate of
investigation that the assessee was beneficiary of bogus accommodation
entries. The Court while upholding the validity of reopening observed
that sufficiency of reason cannot be considered in a writ petition. It was
observed as under:
‘23 The present factual canvas has to be scrutinized on the touchstone of
the aforesaid enunciation of law. It is worth noting that the learned
counsel for the petitioner has submitted with immense vehemence that
the petitioner had entered into correspondence to have the documents but
the assessing officer treated them as objections and made a
communication. However, on a scrutiny of the order, it is perceivable
that the authority has passed the order dealing with the objections in a
very careful and studied manner. He has taken note of the fact that
transactions involving Rs. 27 lakhs mentioned in the table in Annexure
P-2 constitute fresh information in respect of the assessee as a
beneficiary of bogus accommodation entries provided to it and
represents the undisclosed income. The assessing officer has referred to
the subsequent information and adverted to the concept of true and full
disclosure of facts. It is also noticeable that there was specific
information received from the office of the DIT (INV-V) as regards the
transactions entered into by the assessee company with number of
concerns which had made accommodation entries and they were not
genuine transactions. As we perceive, it is neither a change of opinion
nor does it convey a particular interpretation of a specific provision
which was done in a particular manner in the original assessment and
sought to be done in a different manner in the proceeding under Section
147 of the Act. The reason to believe has been appropriately understood
by the assessing officer and there is material on the basis of which the
notice was issued. As has been held in Phool Chand Bajrang Lal v. ITO,
(2016) 1 ITJ Online 825 (SC) : (1993) 203 ITR 456 : (1993) 113 CTR
436 : (1993) 69 Taxman 627 : (1993) 4 SCC 77, Bombay Pharma
Products v. ITO, (2016) 2 ITJ Online 16 (MP) : (2007) 7 ITJ 500 :
(1999) 237 ITR 614 : (1999) 153 CTR 350 : (1999) 107 Taxman 1 and
Anant Kumar Sahariav. CIT, (2016) 1 ITJ Online 805 (GH), the Court,
in exercise of jurisdiction under Article 226 of the Constitution of India
pertaining to sufficiency of reasons for formation of the belief, cannot
interfere. The same is not to be judged at that stage. In SFIL Stock
Broking Ltd., the bench has interfered as it was not discernible whether
the assessing officer had applied his mind to the information and
independently arrived at a belief on the basis of material which he had
before him that the income had escaped assessment. In our considered
opinion, the decision rendered therein is not applicable to the factual
matrix in the case at hand. In the case of Sarthak Securities Co. Pvt. Ltd.
v. ITO, (2016) 1 ITJ Online 827 (Delhi) : (2010) 329 ITR 110 : (2010)
236 CTR 362 : (2010) 195 Taxman 262, the Division Bench had noted
that certain companies were used as conduits but the assessee had, at the
stage of original assessment, furnished the names of the companies with
which it had entered into transactions and the assessing officer was made
aware of the situation and further the reason recorded does not indicate
application of mind. That apart, the existence of the companies was not
disputed and the companies had bank accounts and payments were made
to the assessee company through the banking channel. Regard being had
to the aforesaid fact situation, this Court had interfered. Thus, the said
decision is also distinguishable on the factual score.’
16. Thus, the decision in case of ‘Ceramics Pvt. Ltd. v. State of Gujarat
through Secretary and ors was rendered in an entirely different
background and had no direct application to the question whether on the
basis of information supplied by the Excise Department to the Assessing
Officer of suppression of valuation of goods or clandestine removal of
goods for evading excise duty, notice for re-opening of the assessment
could have been issued.”
11. Considering the aforesaid situation prevailing on record, it appears to this
Court that the background of facts demand reopening of assessment and the
authority is justified in issuing notice under Section 148 of the Act and the
reasons based upon it are sufficient enough to permit the authority to exercise
jurisdiction to reopen the assessment. Even from bare reading of the order
rejecting the objections also, appear to this Court cogent enough as supported
by valid reasons. The same is also not required to be interfered with. Hence,
(2021) ABC 319
the present petition deserves to be dismissed and accordingly, it is dismissed.
Notice is discharged. Interim relief, if any, granted earlier stands vacated.
______________
(2018) 6 ITJ Online 191 (SC)
In the Supreme Court of India
Alkem Laboratories Ltd.
V.
Pr. Commissioner of Income Tax and others
Shri Uday Umesh Lalit and Shri R. Subhash Reddy, JJ.
Petition for Special leave to Appeal (C) No. 24140 of 2018
16th November, 2018
-Held-SLP Dismissed. Pending applicantions disposed off.

Relevant Provisions : N/A.
Relevant Period : N/A.
Counsel :
– J.D. Mistri, Sr. Adv., Ajay Kumar Rastogi, Adv., Ms. Ranjeeta Rohatgi,
AOR, Ms. Smriti Singh, Adv. and Manish Rastogi, Adv., for the Appellant;
– K. Radhakrishnan, Sr. Adv. and Parthiv K. Goswami,, for the Respondent.
Equivalent Citation : (2019) 410 ITR 205 (SC) : (2019) 260 Taxman 101
(SC)
ORDER
1. We see no reason to interfere in the matter. The special leave petition is,
accordingly, dismissed.
2. However, all the contentions are left open which can be agitated at the
appropriate stage in the proceedings.
3. Pending application(s), if any, shall stand disposed of.
______________
(2018) 6 ITJ Online 192 (Patna)

In the High Court of Patna
Alkem Laboratories Ltd
V.
Pr. Commissioner of Income Tax and others
Shri Rajendra Menon, CJ. and Shri Rajeev Ranjan Prasad, J.
Civil Writ Jurisdiction Case No. 10859 of 2018
02nd August, 2018
Reopening of Assessment-S.147 of Income Tax Act,1961-Notice U/s. 148 of
Income Tax Act,1961-Notice dated 12.01.2018 for AY 2011-12-that under
proviso to Section 148 unless the twin pre-conditions of “reason to believe”
and “any income chargeable to tax has escaped assessment for any assessment
year” are satisfied, there cannot be initiation of reassessment proceeding-
Held-In the present case, we do not have benefit of concluded finding of facts
because the petitioner has directly approached this Court in its writ
jurisdiction We agree with the submissions of Ms. Archana Sinha, learned
counsel representing the Revenue that the Act of 1961 provides for certain
statutory authorities vested with the powers to examine the materials based on
which a finding may be recorded-that in absence of any concluded facts being
available before us, it would not be proper to interfere with the impugned
notice and order in the present writ proceeding. We, therefore, dismiss the
writ application giving liberty to the petitioner to avail statutory alternative
remedies, if so advised, in the facts and circumstances of the case.
Final outcome – Dismissed.

Relevant Provisions : S.147 & S.148 of Income Tax Act,1961
Relevant Period : AY 2011-12
CIT v. Agarwalla Bros., (1991) 189 ITR 786 (Patna) [Refer Para 2, 5]
CIT v. Chhabil Dass Agarwal, (2013) 357 ITR 357 (SC) : (2013) 217 Taxman
143 [Refer Para 4, 6]
CIT v. Kelvinator of India Ltd., (2017) 3 ITJ Online 130 (SC) : (2010) 14 ITJ
189 : (2010) 320 ITR 561 : (2010) 228 CTR 488 : (2010) 187 Taxman 312 :
(2010) 34 DTR 49 : (2011) 3 STD 6 : (2010) 2 SCC 723. [Refer Para 3]
ITO v. TechSpan India (P.) Ltd., (2018) 255 Taxman 152 (SC) [Refer Para
2, 3]
Ram and Shyam Co. v. State of Haryana, (1985) 3 SCC 267 [Refer Para 6]
Counsel :
– Ajay Kumar Rastogi, Adv., for the Appellant;
– Smt. Archana Sinha, Adv. Alok Kumar, Adv. and Sanjeev Kumar, Adv.,
for the Respondent.
Equivalent Citation : (2018) 100 Taxman.com 381 (Patna)
(2021) ABC 321
JUDGMENT
Shri Rajeev Ranjan Prasad, J. :
1. This writ application has been preferred questioning the notice under
Section 148 of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’)
dated 12.01.2018 for the Assessment Year 2011-12 issued by the Assistant
Commissioner of Income Tax, Circle-1, Patna (hereinafter referred to as the
‘Assessing Officer’) initiating proceedings for reassessment against the
petitioner. The petitioner has also prayed for quashing of the preliminary
order dated 25.04.2018 passed by the Assessing Officer whereby the
petitioner’s objection to the issuance of notice and assumption of jurisdiction
by respondent no. 3 has been rejected.
2. Mr. Ajay Kumar Rastogi, learned advocate, representing the petitioner,
has placed before us the relevant provisions of Section 148 of the Act. It is his
submission that under proviso to Section 148 unless the twin pre-conditions
of “reason to believe” and “any income chargeable to tax has escaped
assessment for any assessment year” are satisfied, there cannot be initiation of
reassessment proceeding. It is his case that during the Assessment Year 2011-
12 weighted deduction of Rs. 54,72,75,816/-claimed by the petitioner under
Section 35(2AB) stood disallowed during course of original assessment
proceedings and, therefore, the same cannot be said to have escaped
assessment. Learned Counsel submits that belief formed by the Assessing
Officer that income of Rs. 54,72,75,816/- has escaped assessment is contrary
to the materials on record and is a mere pretence, moreover the proceeding
under Section 148 of the Act cannot be initiated at this stage when the
Commissioner of Tax, Circle-1 in exercise of power under Section 263 of the
Act has not found any illegality, irregularity or infirmity in disallowance of
weighted part of deduction under Section 35(2AB) and allowance of research
and development expense actually incurred by the petitioner amounting to Rs.
48,51,70,541/-by the Assessing Officer in assessment order under Section
143(3) dated 28.03.2014. The attention of this Court has been drawn towards
Annexure-2 by which objection raised by the petitioner has been rejected by
the Assessing Officer. According to Assessing Officer, the mere fact that the
earlier Assessing Officer had examined the issue related to deduction claimed
under Section 35(2AB) does not absolve the petitioner from satisfying the
conditions required to avail the benefits of scheme wherein investment in
R&D is being promoted by the government. First condition to avail this
benefit is that the institution claiming deduction under Section 35(2AB) must
be registered for R&D work with the DSIR, Ministry of Science and
Technology. The recipient of the beneficiary is further obliged to present
annually to DSIR the account books which it separately maintains to account
for the expenses incurred towards R&D. In the opinion of the Assessing
Officer in one of the files pertaining to period assessment year 2011-12 to
Assessment Year 2015-16 there exists any indication to the correct amount of
expenditure towards R&D. Mr. Rastogi has relied upon the various judgments
including the judgment of this Court in the case of CIT v. Agarwalla Bros.,
(1991) 189 ITR 786 (Patna) and the judgment of the Hon’ble Supreme Court
of India in the case of ITO v. TechSpan India (P.) Ltd., (2018) 255 Taxman
152 (SC). It is submitted that this Court in the case of Agarwalla Bros.,
(supra) was of the view that in the light of law laid down by the Hon’ble
Supreme Court, this Court can always enquire and ascertain whether the
reasons to believe entertained by the Income-Tax Officer can validly afford a
foundation for assumption of jurisdiction by him or it is a mere pretence and
an effort to undergo a change of opinion. This Court had upheld the view
taken by the Tribunal cancelling the entire assessment under Section 147(a) of
the Act.
3. In the case of TechSpan India (P.) Ltd., (supra), the Hon’ble Apex Court
was considering as to whether the reopening of the completed assessment is
justified in the facts and circumstances of the said case. In the said case return
for Assessment Year in the year 2001-02 was selected for regular assessment
under Section 143(3) of the I.T. Act, a show cause notice was issued to the
respondents as to why the expenses claimed with regard to the allocation of
common expenses between the two heads, viz., software development and
human resource development do not reveal any basis for such allocation. The
issue was duly contested and decided vide order dated 29.11.2004 and the
proceedings ended with a rectification of the assessment order under Section
154 of the Act while arriving at an income of Rs. 31,63,570/- which was fully
set-off against the loss brought forward and the income was assessed as ‘Nil’
for the Assessment Year 2001-02. When a notice dated 10.02.2005 was issued
by the revenue for reopening the assessment under Section 148 of the Act on
the ground that the deduction under Section 10A of the Act has been allowed
in excess and the income escaped assessment works, the High Court set aside
the show cause notice as well as the reassessment order dated 17.08.2005. In
that context of the matter, the Hon’ble Supreme Court considered the
provision of Sections 148 to 153 referred the judgment of the Hon’ble
Supreme Court in the case of CIT v. Kelvinator of India Ltd., (2017) 3 ITJ
Online 130 (SC) : (2010) 14 ITJ 189 : (2010) 320 ITR 561 : (2010) 228 CTR
488 : (2010) 187 Taxman 312 : (2010) 34 DTR 49 : (2011) 3 STD 6 : (2010) 2
SCC 723. The Hon’ble Apex Court found that the point on which the
reassessment proceedings were initiated was well considered in the original
proceedings and, therefore, the very basis of issuance of show notice was
merely because of the fact that the Assessing Officer had changed his opinion
as regards the deduction under Section 10A of the Act.
4. On the other hand, Ms. Archana Sinha, learned Counsel representing the
Revenue while filing the counter affidavit submits that there is no illegality in
initiation of the proceeding for reassessment in the facts of the present case.
Learned counsel submits that the initiation of reassessment of proceeding is
based upon certain facts which have given reasons to believe that income
chargeable to tax has escaped assessment. Learned Counsel submits that from
information received from the DSIR it is found that the petitioner had not
(2021) ABC 323
complied with the requirements which would have made it eligible to get the
benefit of R&D expenses. Learned counsel submits that out of total deduction
of claim of Rs. 103,24,46,357/-under Section 35(2AB) of the Act, the amount
of Rs. 54,72,75,816/- was disallowed and Rs. 48,51,76,541/- was allowed
without any basis. It is submitted that the Assessing Officer has reasons to
believe that such amount is escaped amount and, therefore, it is being a pure
question of fact cannot be gone into in a writ proceeding. Learned counsel
submits that the judgments relied upon on behalf of the petitioner would not
be applicable in the facts and circumstances of the present case. It is further
submitted that the notice under Section 148 has been issued within the time
limit as provided under Section 149 of the IT Act. A further objection has
been taken that maintaining the hierarchical system for redressal of the
grievance, the petitioner should have approached the statutory remedy before
moving this Court in its writ jurisdiction Learned Counsel has relied upon a
judgment of the Hon’ble Apex Court in the case of CIT v. Chhabil Dass
Agarwal, (2013) 357 ITR 357 (SC) : (2013) 217 Taxman 143. Learned
Counsel submits that the Hon’ble Supreme Court has in a catena of decision
held that though Article 226 confers a very wide powers in the matter of
issuing writs, the remedy of writ is absolutely discretionary in character and if
the High Court is satisfied that the aggrieved party can have an adequate or
suitable relief elsewhere, it can refuse to exercise its jurisdiction Reference
has been made to paragraphs 19, 20 and 21 of the judgment of the Hon’ble
Apex Court in the case of Chhabil Dass Agarwal, (supra).
5. Having heard learned Counsel for the parties and on perusal of the
records, we find that at this stage it would not be just and proper for the writ
Court to entertain the present writ application. In the case of Agarwalla Bros.,
(supra), this Court was dealing with a case which was referred to this Court
by the Income Tax Appellate Tribunal under Section 256(1) of the Act. The
Tribunal had referred two questions of law to this Court. Those two questions
were in the following terms :–
“1. Whether, on the facts and in the circumstances of the case, the
Tribunal is justified in law in cancelling the entire assessment under
section 147(a) of the Income Tax Act, 1961 for the Assessment Year
1962-63? (referred in Tax Case No. 39 of 1978).
2. Whether, on the facts and in the circumstances of the case, the
cancellation of the penalty under Section 271(1)(c) of the Income Tax
Act, 1961, by the Tribunal was legal? (referred in Tax Case No. 40 of
1978).”
This Court found that in the said case, it was not necessary for this Court to
come to an independent finding to ascertain whether, by reason of any
omission or failure on the part of the assessee to disclose fully and truly all
materials facts necessary for his assessment for the assessment year in
question, any income chargeable to tax has escaped or not, the Court observed
that it is essentially a question of fact and because in the said case, the
Tribunal, after examining the entire records, have recorded that, at the time of
the original assessment, the facts were disclosed by the assessee and the
Income-Tax officer found the investments shown to be reasonable, this Court
proceeded to hold that the Tribunal had rightly quashed the entire assessment
order.
6. In the present case, we do not have benefit of concluded finding of facts
because the petitioner has directly approached this Court in its writ
jurisdiction We agree with the submissions of Ms. Archana Sinha, learned
counsel representing the Revenue that the Act of 1961 provides for certain
statutory authorities vested with the powers to examine the materials based on
which a finding may be recorded. Paragraph 19, 20 and 21 of the judgments
of the Hon’ble Apex Court in Chhabil Dass Agarwal’s case (supra) would be
important to take note of hereinabove :–
“19. Thus, while it can be said that this Court has recognized some
exceptions to the rule of alternative remedy, i.e., where the statutory
authority has not acted in accordance with the provisions of the
enactment in question, or in defiance of the fundamental principles of
judicial procedure, or has resorted to invoke the provisions which are
repealed, or when an order has been passed in total violation of the
principles of natural justice, the proposition laid down in Thansingh
Nathmal case, Titagarh Paper Mills case and other similar judgments that
the High Court will not entertain a petition under Article 226 of the
Constitution if an effective alternative remedy is available to the
aggrieved person or the statute under which the action complained of has
been taken itself contains a mechanism for redressal of grievance still
holds the field. Therefore, when a statutory forum is created by law for
redressal of grievances, a writ petition should not be entertained ignoring
the statutory dispensation.
20. In the instant case, the Act provides complete machinery for the
assessment/re-assessment of tax, imposition of penalty and for obtaining
relief in respect of any improper orders passed by the Revenue
Authorities, and the assessee could not be permitted to abandon that
machinery and to invoke the jurisdiction of the High Court under Article
226 of the Constitution when he had adequate remedy open to him by an
appeal to the Commissioner of Income Tax (Appeals). The remedy under
the statute, however, must be effective and not a mere formality with no
substantial relief. In Ram and Shyam Co. v. State of Haryana, (1985) 3
SCC 267 this Court has noticed that if an appeal is from “Caesar to
Caesar’s wife” the existence of alternative remedy would be a mirage
and an exercise in futility. In the instant case, neither has the assessee-
writ petitioner described the available alternate remedy under the Act as
ineffectual and non-efficacious while invoking the writ jurisdiction of
the High Court nor has the High Court ascribed cogent and satisfactory
reasons to have exercised its jurisdiction in the facts of instant case.
(2021) ABC 325
21. In light of the same, we are of the considered opinion that the Writ
Court ought not to have entertained the Writ Petition filed by the
assessee, wherein he has only questioned the correctness or otherwise of
the notices issued under Section 148 of the Act, the re-assessment orders
passed and the consequential demand notices issued thereon.”
7. In the aforementioned case, the Hon’ble Supreme Court while setting
aside the judgment and order of the Hon’ble High Court passed in Writ
Petition (C) No. 44 of 2009 by which the High Court had interfered with the
notice under Section 148 of the Act, granted liberty to the respondents to file
an appropriate petition/appeal against the order of reassessment passed under
Section 148 of the Act.
8. We are of the considered opinion that in absence of any concluded facts
being available before us, it would not be proper to interfere with the
impugned notice and order in the present writ proceeding. We, therefore,
dismiss the writ application giving liberty to the petitioner to avail statutory
alternative remedies, if so advised, in the facts and circumstances of the case.
______________
(2018) 6 ITJ Online 193 (Guj)
Aradhna Estate Pvt. Ltd.
v.
Shri Akil Kureshi and Shri B.N. Karia, JJ.
20th February, 2018
Reopening of Assessment-S.147 of the Income Tax Act,1961-Notice U/s.
148 of the Income Tax Act,1961-Notice Dated 31.03.2017 for AY 2010-
11-Original Assessment carried under the provisions of S.143(3) of Income
Tax Act,1961-Scrutiny Assessment-The petitioner is a private limited
company. For the Assessment Year 2010-2011, the petitioner had filed
return of income on 21.09.2010 declaring a total income of Rs. 15.14 lacs
(rounded off). Such return was taken in scrutiny by the Assessing Officer.
During such scrutiny assessment, he had raised queries about share
application money received by the company from various entities. The
petitioner replied to such queries, upon which, the order of assessment
under Section 143(3) of the Income Tax Act came to be passed on
01.01.2013 making no addition with respect to such share application
money-On verification of the materials available on record and facts and
circumstances of the case, it is seen that the assessee has shown to have
received share capital/share premium amounting to Rs. 14,76,00,000/-
(share capital Rs. 99,45,000 + share premium Rs. 13,76,55,000). Since, the
investor companies have been proved to be shell companies indulged in
providing accommodation entries, the share capital/share premium claimed

to have been received, from such companies by the assessee company is not
genuine. Therefore, this amount is nothing but assessee company’s own
money introduced in the grab of share capital/share premium from the shell
company and as such liable for taxation under the provisions of Section 68
of the IT. Act-The department received information suggesting that the
transactions of share application money received in case of the assessee
company were not genuine and were merely entries provided by different
entities and in reality it was nothing but the assessee's own funds which
were being introduced in the guise of share capital or share premium
through shell companies. In that view of the matter, reopening even beyond
the period of four years would be permissible. Merely because the
Assessing Officer during the assessment proceedings had examined this
issue would not preclude him from resorting to reopening of the assessment
when fresh material was brought to his notice to which he had applied his
mind and formed a belief that income chargeable to tax had escaped
assessment, that too, on account of failure on part of the assessee to
disclose truly and fully all material facts. Counsel submitted that at this
stage in exercise of judicial review, the Court would not go into the
sufficiency of such reasons. As long as it is pointed out that the Assessing
Officer had tangible materials at his command to form such a belief and he
after application of mind formed such bona fide belief, the Court would not
scuttle the reopening process-Held-The contention that there was no failure
on part of the assessee to disclose truly and fully facts cannot be accepted.
The Assessing Officer, as noted, received fresh material after the
assessment was over, prima facie, suggesting that the assessee company
had received bogus share application/premium money from number of shell
companies.
-Merely because the transactions in question were examined by the
Assessing Officer during the original assessment would not make any
difference. The scrutiny was on the basis of disclosures made and materials
supplied by the assessee. Such material is found to be prima facie untrue
and disclosures not truthful. Earlier scrutiny or examination on the basis of
such disclosures or materials would not debar a fresh assessment.
-The Assessing Officer recorded detailed reasons pointing out the material
available which had a live link with formation of belief that the income
chargeable to tax had escaped assessment. At this stage, as is often
repeated, we would not go into sufficiency of such reasons.
- At this stage the Assessing Officer was not required to hold conclusively
that additions invariably be made. He truly had to form a bona fide belief
that income had escaped assessment.
-At the stage of the issuance of the notice, the only question is whether
there was relevant material, as stated above, on which a reasonable person
could have formed the requisite belief
(2021) ABC 327

Relevant Provisions : S.147 & S.148 of Income Tax Act,1961
Aaspas Multimedia Ltd. v. Dy. CIT, (2017) 249 Taxman 568 (Guj.) [Refer
Para 6]
AGR Investment Ltd. v. Additional Commissioner of Income Tax and anr,
(2016) 1 ITJ Online 803 (Delhi) : (2011) 333 ITR 146 : (2011) 239 CTR
378 : (2011) 197 Taxman 177 [Refer Para 16]
Allied Strips Ltd. v. Asstt. CIT, (2016) 384 ITR 424 (Del): (2016) 69
taxmann.com 444 [Refer Para 5, 11]
Anant Kumar Sahariav. CIT, (2016) 1 ITJ Online 805 (GH) [Refer Para
16]
Asstt. Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers P.
Limited,, (2016) 2 ITJ Online 289 (SC) : (2007) 9 ITJ 85 : (2014) 10
STD 602 : (2007) 291 ITR 500 : (2007) 210 CTR 30 : (2007) 161
Taxman 316 : (2008) 14 SCC 208 [Refer Para 12, 13]
Bombay Pharma Products v. ITO, (2016) 2 ITJ Online 16 (MP) : (2007) 7
ITJ 500 : (1999) 237 ITR 614 : (1999) 153 CTR 350 : (1999) 107 Taxman
1 [Refer Para 16]
Central Provinces Manganese Ore Co. Ltd. v. ITO, (2016) 1 ITJ Online
808 (SC) : (1991) 191 ITR 662 : (1991) 98 CTR 161 : (1991) 59 Taxman
17 [Refer Para 16]
Harikishan Sunderlal Virmani v. Dy. CIT, (2017) 394 ITR 146 (Guj)
[Refer Para 5]
Jayant Security & Finance Ltd. v. Asstt. CIT, (Special Civil Application
No. 18921/2017, order dated 12.02.2018) [Refer Para 12]
Phool Chand Bajrang Lal v. ITO, (2016) 1 ITJ Online 825 (SC) : (1993)
203 ITR 456 : (1993) 113 CTR 436 : (1993) 69 Taxman 627 : (1993) 4
Pr. CIT v. Gokul Ceramics, (2016) 241 Taxman 1 (Guj.) [Refer Para 16]
Raymond Woolen Mills Ltd. v. ITO, (2016) 2 ITJ Online 811 (SC) :
(1999) 236 ITR 34 : (1999) 152 CTR 418 [Refer Para 6, 13]
Sarthak Securities Co. Pvt. Ltd. v. ITO, (2016) 1 ITJ Online 827 (Delhi) :
(2010) 329 ITR 110 : (2010) 236 CTR 362 : (2010) 195 Taxman 262
[Refer Para 16]
Sterlite Industries (India) Ltd. v. Assistant Commissioner of Income Tax,
(2008) 302 ITR 275 (Mad.) [Refer Para 16]
Yogendrakumar Gupta v. ITO, (2014) 366 ITR 186 (Guj.): (2014) 46
taxmann.com 56 [Refer Para 6, 11]
Counsel :
– Manish J. Shah, Adv., for the Appellant;
– Mrs. Kalpanak Raval, Adv., for the Respondent.
Equivalent Citation : (2018) 100 Taxman.com 381 (Patna)
JUDGMENT
Shri Akil Kureshi, J. :
1. The petitioner has challenged a notice dated 31.03.2017 issued by the
respondent Assessing Officer to reopen the petitioner's assessment for the
Assessment Year 2010-2011.
2. Brief facts are as under. The petitioner is a private limited company. For
the Assessment Year 2010-2011, the petitioner had filed return of income on
21.09.2010 declaring a total income of Rs. 15.14 lacs (rounded off). Such
return was taken in scrutiny by the Assessing Officer. During such scrutiny
assessment, he had raised queries about share application money received by
the company from various entities. The petitioner replied to such queries,
upon which, the order of assessment under Section 143(3) of the Income Tax
Act came to be passed on 01.01.2013 making no addition with respect to such
share application money.
3. To reopen such assessment, the Assessing Officer issued impugned
notice. In order to do so, he had recorded the following reasons :
“The assessee has filed its return of income for FY. 2009-10 on
21.09.2010 declaring total income at Rs. The assessment u/s. 143(3) of
the Act was completed on 15,14,993/and income as determined at Rs.
15,14,990/-.
In the case of the assessee, information have been received from the
DDIT (Inv) Unit-3(1), Kolkata in reference to sharing of information of
shell companies which have given accommodation entries for share
premium in Surat based companies. Vide the referred communication,
the DDIT (Inv) Unit-3(1), Kolkata has provided list of 114 Kolkata based
shell companies which have given accommodation entries in Surat based
companies. It has also been stated by the DDIT (Inv) that master data of
paper/shell companies maintained by the Kolkata Directorate which has
been prepared/complied on the basis of statement of many entry
operators/dummy directors recorded during various search & seizure
operation/survey operations/investigations/Inquires was checked.
On perusal of data so provided by the DDIT(Inv) Unit-3(1), Kolkata, it is
noticed that during the period under consideration, the assessee company
has accepted share capital/share premium from the following
entities/parties which have been proved to be shell companies based on
the investigation conducted by the DDIT(Inv) Unit-3(1), Kolkatta :
(2021) ABC 329
Sr. Name of the Investor Equity Share Share
No. shares capital Premium
1 Welon Advisory Services Pvt. 30000 3000000 5700000
Ltd. 6, Hanspukur Lane, 1st
floor, Room No. 106, Kolkata
2 Bonaza Vyapaar Pvt. Ltd, 17500 175000 3325000
136, Amlangshu Sen Road, 1st
floor, Kolkatta
3 ETL Infrastructure Finance 25000 250000 4750000
Limited 1 B Black Burn Lane
4th Floor, Kolkatta
4 Ishunand Trading Pvt. Ltd, 31000 310000 5890000
29A Weston Street, 3rd Floor,
R.No.C-2, Kolkatta
5 J.P. Engineering Corporation 42000 420000 7890000
Pvt. Ltd., AE-326, Salt Lake
City, Ground Floor, Kolkatta
6 Subhlabh tradecomm Pvt Ltd., 12500 125000 2375000
29A Weston Street 3rd Floor,
C-2, Omer Mansi, Kolkata
7 Swift Vyapaar Pvt ltd. 27, 12500 125000 2375000
Braboune Road, 4th floor,
Room No. 401, Kolkata
8 Acolyte Tie-Up Pvt Ltd. 574, 12500 125000 2375000
Dakhindari Road, Grund
Floor, Kolkata-700048
9 Bravemen Traders Pvt Ltd 14000 140000 2660000
Rgm-744, Chainar Park, P.O.
Hatiara, Opp Club Town
Enclave Kolkata-700157
10 Sahiba Agencies Pvt Ltd. 23a, 14000 140000 2660000
Kalakar Street, 2nd Floor,
Kolkata-700007
11 Transtarde Vinimay Pvt Ltd. 12500 125000 2375000
8/1b, Centre Sinthee Road, Po
Sinthee Kolkata-700050
12 Slow And Sound Electronics 58500 585000 11115000
Pvt Ltd. 2, Digamber Jain
Temple Road, 1st Floor,
Room No. 28, Kolkata-
700007
13 Subhrekha Vyappar Pvt Ltd. 65000 650000 12350000
6, Hanspukur Lane, 1st Floor
Room No.106 Kolkata
7000007
14 Arihant Enterprise Ltd. 27, 19000 550000 3610000
Sikdar Para Street, Ground
Floor, Kolkata
15 Elgin Sales Promotion Ltd. 6, 55000 190000 10450000
Hanspukur Lane, 1st Floor
Kolkata 700007
16 Galore Suppliers Pvt Ltd. 2, 60000 600000 11400000
Digamber Jain Temple Road,
1st Floor, Room No .28,
Kolkata-700007
17 Msv Fiscal Services Pvt Ltd.- 68500 685000 13015000
2, Digamber Jain Temple
Road 1st Floor Kolkata-
700007
18 Radiant Merchandise Pvt Ltd. 61000 610000 11590000
2, Digamber Jain Temple
Road, 1st Floor, Kolkata
700007
19 Roseberry Distributors Pvt 48500 485000 9215000
Ltd. 2, Digamber Jain Temple
Road, 1st Floor, Kolkata
700007
20 SK Stock Dealers Pvt Ltd. 2, 65500 655000 12445000
Digamber Jain Temple Road,
1st Floor, Kolkata 700007
724500 9945000 137655000
On verification of the materials available on record and facts and
circumstances of the case, it is seen that the assessee has shown to have
received share capital/share premium amounting to Rs. 14,76,00,000/-
(share capital Rs. 99,45,000 + share premium Rs. 13,76,55,000). Since,
the investor companies have been proved to be shell companies indulged
in providing accommodation entries, the share capital/share premium
claimed to have been received, from such companies by the assessee
company is not genuine. Therefore, this amount is nothing but assessee
company’s own money introduced in the grab of share capital/share
premium from the shell company and as such liable for taxation under
the provisions of Section 68 of the IT. Act.
(2021) ABC 331
In view of the above facts, since the above companies are proved to be
bogus/paper companies and were given accommodation entries to the
assessee company by way of share capital and share premium during the
F.Y. 2009-10. I have reason to believe that the share capital/share
premium received to the extent Rs. 14,76,00,000/- (share capital Rs.
99,45,000 + share premium Rs. 13,76,55,000) has escaped the
assessment for A.Y. 2010-11 and the assessee company had failed to
disclose full and true facts of its case, within the meaning of provisions
of Section 147 of the IT. Act. Therefore, I am satisfied that this is a fit
case for issue of notice u/s. 148 r.w.s. 147 of the Act for action u/s. 147
of the Act for the A. Y. 2010-11”.
4. The petitioner raised objections to the notice of reopening under letter
dated 13.05.2017. Such objections were however, rejected by the Assessing
Officer by an order dated 28.07.2017, upon which, the petitioner filed the
present petition.
5. Taking us through the materials on record, counsel for the petitioner
raised the following contentions in support of the challenge :
(1) The notice of reopening has been issued beyond a period of four
years from the end of relevant assessment year, the original assessment
having been framed after scrutiny. There was no failure on part of the
assessee to disclose truly and fully all material facts necessary for
assessment. Impugned notice therefore, is bad in law.
(2) During the scrutiny assessment, the Assessing Officer had minutely
examined the nature and source of share application money received by
the assessee company. The assessee had supplied all necessary details.
Only upon being satisfied about the genuineness of such investments that
the Assessing Officer made no additions. Any attempt on his part to
revisit this issue would be a change of opinion. In this connection,
counsel relied on judgment of Division Bench of Delhi High Court in
case of Allied Strips Ltd. v. Asstt. CIT, (2016) 384 ITR 424 (Del) : (2016)
69 taxmann.com 444.
(3) The reasons recorded by the Assessing Officer lack validity.
Nowhere has it come on record that the Director of the companies who
had invested in share capital of the petitioner company had stated that
such investments are bogus. The Assessing Officer has not demonstrated
any material at his command to form a belief that the income chargeable
to tax had escaped assessment.
(4) Our attention was drawn to the newly inserted proviso to section 68
of the Income Tax Act, 1961, to contend that the case of the assessee
would be governed by pre-amended section 68 of the Act and in any
case, the assessee had during the original assessment complied with the
requirements of the proviso newly inserted to the said provision.
(5) The counsel contended that the Assessing Officer has merely relied
on the report of the investigation wing without independent application
of mind. He has thus acted on borrowed satisfaction that income
chargeable to tax has escaped assessment. In this respect counsel relied
on judgment of Division Bench of this Court in case of Harikishan
Sunderlal Virmani v. Dy. CIT, (2017) 394 ITR 146 (Guj).
6. On the other hand, learned Counsel Shri Nikunt Raval for the department
opposed the petition contending that after the assessment was framed, the
department received information suggesting that the transactions of share
application money received in case of the assessee company were not genuine
and were merely entries provided by different entities and in reality it was
nothing but the assessee's own funds which were being introduced in the guise
of share capital or share premium through shell companies. In that view of the
matter, reopening even beyond the period of four years would be permissible.
Merely because the Assessing Officer during the assessment proceedings had
examined this issue would not preclude him from resorting to reopening of
the assessment when fresh material was brought to his notice to which he had
applied his mind and formed a belief that income chargeable to tax had
escaped assessment, that too, on account of failure on part of the assessee to
disclose truly and fully all material facts. Counsel submitted that at this stage
in exercise of judicial review, the Court would not go into the sufficiency of
such reasons. As long as it is pointed out that the Assessing Officer had
tangible materials at his command to form such a belief and he after
application of mind formed such bona fide belief, the Court would not scuttle
the reopening process. Counsel relied on judgment of the Supreme Court in
case of Raymond Woolen Mills Ltd. v. ITO, (2016) 2 ITJ Online 811 (SC) :
(1999) 236 ITR 34 : (1999) 152 CTR 418 in which it was observed as under :
“In this case, we do not have to give a final decision as to whether there
is suppression of material facts by the assessee or not. We have only to
see whether there was prima facie some material on the basis of which
the Department could reopen the case. The sufficiency or correctness of
the material is not a thing to be considered at this stage. We are of the
view that the court cannot strike down the reopening of the case in the
facts of this case. It will be open to the assessee to prove that the
assumption of facts made in the notice was erroneous. The assessee may
also prove that no new facts came to the knowledge of the Income-tax
Officer after completion of the assessment proceeding. We are not
expressing any opinion on the merits of the case. The questions of fact
and law are left open to be investigated and decided by the assessing
authority. The appellant will be entitled to take all the points before the
assessing authority. The appeals are dismissed. There will be no order as
to costs.”
Counsel also relied on judgment of the Division Bench of this Court in case of
Yogendrakumar Gupta v. ITO, (2014) 366 ITR 186 (Guj.): (2014) 46
(2021) ABC 333
taxmann.com 56 in which the Court permitted reopening to the department
which was based on similar transaction of bogus share application money.
Counsel pointed out that the judgment in case of Yogendrakumar Gupta,
(supra) was followed later in case of Aaspas Multimedia Ltd. v. Dy. CIT,
(2017) 249 Taxman 568 (Guj.).
7. We have reproduced the reasons recorded by the Assessing Officer for
reopening the assessment. In such reasons, he pointed out that the information
was received from the investigation wing of the department at Calcutta
regarding shell companies which had given accommodation entires for share
premium to Surat based companies. A list of 114 Calcutta based companies
was provided which had given accommodation entries to such Surat based
companies. Statements of many entry operators and dummy Directors
recorded during various search and seizure operation, survey operation and
investigation were checked. The Assessing Officer thereupon proceeded to
record that “ On perusal of data so provided by the DDIT (Inv) Unit-3(1),
Kolkatta, it is noticed that during the period under consideration, the assessee
company has accepted share capital/share premium from the following
entries/parties which have been proved to be shell companies based on the
investigation conducted by the DDIT(Inv) Unit-3(1), Kolkatta”. Underneath,
he provided a list of 17 companies who had transacted with the assessee
company during the year under consideration and were alloted equity shares
by purported investment of sizeable share capital and share premium amounts.
On verification of such materials, the Assessing Officer noted that the
assessee had received share capital/share premium amount, amounting to Rs.
14.76 crores. Since the investor companies were found to be shell companies
indulging in providing accommodation entries, the Assessing Officer was of
the opinion that the share capital/share premium claimed to have been
received from the company by the assessee was not genuine. Amount is
nothing but assessee's own money introduced in the garb of share
capital/share premium from the shell companies and therefore, such amount is
liable to be taxed under Section 68 of the Act. He therefore, recorded his
satisfaction that the income to the tune of Rs. 14.76 crores had escaped
assessment and that this was due to the assessee having failed to disclose truly
and fully all facts.
8. Section 147 of the Act provides inter-alia that if the Assessing Officer
has the reason to believe that any income chargeable to tax has escaped
assessment, he may subject to the provisions of Section 148 to 153 of the Act,
assess or reassess such income. Proviso to Section 147 of-course requires that
where the assessment under sub-section (3) of Section 143 of the Act has been
made for the relevant assessment year, no action shall be taken under this
section after the expiry of the four years from the end of the relevant
assessment year, unless any income chargeable to tax has escaped assessment
by reason of the failure on part of the assessee to make return under Section
139 or in response to a notice issued under sub-section (1) of Section 142 or
148 or to disclose fully and truly all material facts necessary for his
assessment for that assessment year. In this context, it is well settled that the
requirement of full and true disclosure on part of the assessee is not confined
to filing of return alone but would continue all through out during the
assessment proceedings also. In this context, the materials on record would
suggest that the Assessing Officer had received fresh information after the
assessment was over prima facie suggesting that sizeable amount of income
chargeable to tax in case of the assessee had escaped assessment and that such
escapement was on account of failure on part of the assessee to disclose truly
and fully all material facts. The Assessing Officer formed such a belief on the
basis of such materials placed before him and upon perusal of such material.
This is not a case where the Assessing Officer was reexamining the materials
and the documents already on record filed by the assessee along with the
return or subsequently, brought on record during the assessment proceedings.
It is a case where entirely new set of documents and materials was placed for
his consideration compiled in the form of report received from the
investigation wing. Such material was perused by the Assessing Officer and
upon examination thereof, he formed a belief that the petitioner company had
received share application and share premium money from as many as 20
different investor companies who were found to be shell companies and
indulging in giving accommodation entries. From our view point, the
Assessing Officer had sufficient material at his command to form such a
belief. Such materials did not form part of the original assessment
proceedings and was placed before the Assessing Officer only after the
assessment was completed. Since on the basis of such materials, Assessing
Officer, as we have recorded, came to a reasonable belief that income
chargeable to tax had escaped assessment, merely because these transactions
were scrutinised by the Assessing Officer during the original assessment also
would not preclude him from reopening the assessment. His scrutiny during
the assessment will necessarily be on the basis of the disclosures made by the
assessee.
9. With these foundational conclusions, we may deal with the contentions
of the counsel for the petitioner :
10. The contention that there was no failure on part of the assessee to
disclose truly and fully facts cannot be accepted. The Assessing Officer, as
noted, received fresh material after the assessment was over, prima facie,
suggesting that the assessee company had received bogus share
application/premium money from number of shell companies.
11. Merely because the transactions in question were examined by the
Assessing Officer during the original assessment would not make any
difference. The scrutiny was on the basis of disclosures made and materials
supplied by the assessee. Such material is found to be prima facie untrue and
disclosures not truthful. Earlier scrutiny or examination on the basis of such
disclosures or materials would not debar a fresh assessment. Each individual
case of this nature is bound to have slight difference in facts. Judgement of
(2021) ABC 335
Delhi High Court in case of Allied Strips Ltd., (supra) does not suggest that
merely because a particular issue was examined during the original
assessment proceeding, the Assessing Officer would be debarred from
resorting to reopening of the assessment, even if he had sufficient fresh
materials at his command, to form a reasonable belief that the assessee had
made incorrect disclosures or had not made full disclosures which would have
a vital bearing on the assessment of his income. If that is the ratio, counsel for
the petitioner wishes to cull out from such judgment, we record our respectful
disagreement. In case of Yogendrakumar Gupta, (supra), the Court rejected a
petition challenging the notice of reopening which was issued beyond a period
of four years from the end of relevant assessment year, in which also one of
the grounds was that the issue was previously scrutinised during the
assessment proceedings. The Court observed as under :
“16. Ostensibly, thus, there was disclosure and the occasion would not
arise to term this as the assessee not having disclosed fully and truly all
the material facts necessary for assessment. However, in essence, if the
unsecured loans obtained from Basant Marketing Pvt. Ltd. from the
material supplied by them, the DCIT, Kolkata reveals that the same was
as a result of accommodation entry in the form of loans and advances
from Basant Marketing Pvt. Ltd. to the tune of Rs. 8.71 crore, the case of
the assessee would surely be covered under the said provision of law as
it would not amount to full and true disclosure on the part of the
assessee.
At this stage, the reasons recorded shall have to be regarded, which have
been based on the information contained in the report of the DCIT,
Kolkata, dated March 24, 2013, wherein it had been noticed that the
assessee company obtained accommodation entry in the form of loans
and advances from Basant Marketing Pvt. Ltd. and, therefore, the
Assessing Officer based his reason to believe that the income chargeable
to tax had escaped the assessment.
** ** **
17. In the post notice correspondence dated March 05, 2014, it has been
stated by the Assessing Officer that Basant Marketing Pvt. Ltd. provided
accommodation entry to various companies, where assessee company is
one of them. Basant Marketing Pvt. Ltd. is a dummy company of one
Shri Arun Dalmia and substantial material is found to base such reasons
recorded during the search by CBI, Mumbai and, therefore, the
Assessing Officer issued a notice to show cause as to why the said
amount of Rs. 8.71 crore received from Basant Marketing Pvt. Ltd.
should not be treated as cash credit under section 68 of the Act.
21. This Court has examined the belief of the Assessing Officer to a
limited extent to inquiry as to whether there was sufficient material
available on record for the Assessing Officer to form a requisite belief
whether there was a live link existing of the material and the income
chargeable to tax that escaped assessment. This does not appear to be the
case where the Assessing Officer on vague or unspecific information
initiated the proceedings of re-assessment, without bothering to form his
own belief in respect of such material. We need to notice that the Joint
Director, CBI, Mumbai, intimated to the DIT (Investigation), Mumbai. A
case is registered against Mr. Arun Dalmia, Harsh Dalmia and during the
search at their residence and office premises, the substantial material
indicated that 20 dummy companies of Mr. Arun Dalmia were engaged
in money laundering and the income-tax evasion. The said entities
included Basant Marketing Pvt. Ltd. also. From the analysis of details
furnished and the beneficiaries reflected, which are spread across the
country, the CIT, Koklata, suspected the accommodation entry related to
the Assessment Year 2006-07 as well, this information has been
provided to Director General of Income Tax, Kolkata, who in turn,
communicated to the Chief Commissioner of Income-tax, Ahmedabad.
Further revelation of investigation as could be noticed from the record
examined (file) deserves no reflection in this petition. Insistence on the
part of the petitioner to provide any further material forming the part of
investigation carried out against Dalmias also needs to meet with
negation, as the law requires supply of information on which Assessing
Officer recorded her satisfaction, without necessitating supply of any
specific documents. The proceedings initiated under section 147 of the
Act would not be rendered void on non-supply of such document for
which confidentiality is claimed at this stage, following the decision of
the Delhi High Court in case of Acorus Unitech Wireless (P.) Ltd..
Assumption of jurisdiction on the part of the Assessing Officer is since
based on fresh information, specific and reliable and otherwise
sustainable under the law, challenge to reassessment proceedings warrant
no interference.”
12. In case of Jayant Security & Finance Ltd. v. Asstt. CIT (Special Civil
Application No. 18921/2017, order dated 12.02.2018), this Court observed as
under :
“8. The question of change of opinion and failure on the part of the
assessee to disclose truly and fully all material facts, in the present case
are closely connected. Undoubtedly, as noted earlier, the Assessing
Officer during the original assessment had examined the transactions.
However, such examination would necessarily be on the basis of
disclosures made by the assessee in the return filed and during the
scrutiny assessment. If the Assessing Officer has information to form a
reasonable opinion that prima facie the entire transaction itself was sham
and bogus, as reference to such transaction during the original
assessment and raising certain queries in this respect would not prevent
him from reopening the assessment on the principle of change of
opinion. As noted, the opinion would be formed on the basis of
disclosures. When disclosures are found to be prima facie untrue, the
(2021) ABC 337
opinion formed earlier would not prevent Assessing Officer from
examining the issue. In the present case, as noted, Assessing Officer
received additional information after the original assessment was over,
on the basis of which he formed a belief that the entire transaction was a
sham transaction. At this stage, where the Court is examining the validity
of notice of reopening, it is not necessary that the Assessing Officer must
have conclusive evidence to hold that invariably additions would be
made in the income of the assessee. What is required is the reason to
believe that income chargeable to tax as escaped assessment. Sufficiency
of the materials in the hand of the Assessing Officer which enabled him
to form such a belief would not be examined. A reference in this respect
is made to a decision of the Supreme Court in the case of Asstt.
Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers P. Limited,
reported in (2016) 2 ITJ Online 289 (SC) : (2007) 9 ITJ 85 : (2014) 10
STD 602 : (2007) 291 ITR 500 : (2007) 210 CTR 30 : (2007) 161
Taxman 316 : (2008) 14 SCC 208.”
13. The next contention that the Assessing Officer did not demonstrate any
material enabling him to form a belief that income chargeable to tax has
escaped assessment is fallacious. The Assessing Officer recorded detailed
reasons pointing out the material available which had a live link with
formation of belief that the income chargeable to tax had escaped assessment.
At this stage, as is often repeated, we would not go into sufficiency of such
reasons. In this context, reference can be made to decision of Supreme Court
in case of Raymond Woolen Mills Ltd., (supra). In case of Asstt. CIT v. Rajesh
Jhaveri Stock Brokers (P.) Ltd., (supra) it was observed as under :
“The expression reason to believe in Section 147 would mean cause or
justification. If the Assessing Officer has cause or If the Assessing
Officer has cause or justification to know or suppose that income had
escaped assessment, it can be said to have reason to believe that an
income had escaped assessment. The expression cannot be read to mean
that the Assessing Officer should have finally ascertained the fact by
legal evidence or conclusion. What is required is reason to believe but
not the established fact of escapement of income. At the stage of issue of
notice, the only question is whether there was relevant material on which
a reasonable person could have formed a requisite belief. Whether the
materials would conclusively prove the escapement is not the concern at
that stage. This is so because the formation of belief is within the realm
of subjective satisfaction of the Assessing Officer.”
14. Section 68 of the Act, as is well known, provides that where any sum is
found credited in the books of an assessee maintained for any previous year,
and the assessee 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, the sum so credited maybe charged to Income Tax as the income
of the assessee of that previous year. That the share application money
received by the assessee from above-noted companies was only by nature of
accommodation entries and in reality, it was the funds of the assessee which
was being re-routed. Undoubtedly. Section 68 of the Act would have
applicability. Proviso added by the Finance Act 2012 with effect from
01.04.2013, does not change this position. Proviso reads as under :–
‘68....
Provided that where the assessee is a company (not being a company in
which the public are substantially interested), 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
assessee-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 sum so credited; and
(b) such explanation in the opinion of the Assessing Officer aforesaid
has been found to be satisfactory;…..”
15. As per this proviso, where the assessee is a company and the sum so
credited consists of share application money, share capital, share premium or
any such amount by whatever name called, explanation offered by the
assessee company shall be deemed to be not satisfactory, unless the person in
whose name such credit is recorded in the books of the company also offers
an explanation about the nature and source of sum so credited and such
explanation in the opinion of the Assessing Officer has been found to be
satisfactory. Essentially, this proviso eases the burden of proof on the
Revenue while making addition under Section 168 with respect to non
genuine share application money of the companies. Even in absence of such
proviso as was the case governing the periods with which we are concerned in
the present case, if facts noted by the Assessing Officer and recorded in
reasons are ultimately established, invocation of Section 68 of the Act would
be called for.
16. The contention that the Assessing Officer had merely and mechanically
acted on the report of the investigation wing also cannot be accepted. We
have reproduced the reasons recorded by the Assessing Officer and noted the
gist of his reasons for resorting to reopening of the assessment. We have
recorded that the Assessing Officer had perused the materials placed for his
consideration and thereupon, upon examination of such materials formed a
belief that income chargeable to tax had escaped assessment. In case of Pr.
CIT v. Gokul Ceramics, (2016) 241 Taxman 1 (Guj.), similar contention was
raised by the counsel for the assessee contending that the Assessing Officer
had acted mechanically on the investigation carried out by the Excise
department and not formed his independent belief. Such a contention was
rejected making the following observations :
(2021) ABC 339
“9. It can thus be seen that the entire material collected by the DGCEI
during the search, which included incriminating documents and other
such relevant materials, was along with report and show-cause notice
placed at the disposal of the Assessing Officer. These materials prima
facie suggested suppression of sale consideration of the tiles
manufactured by the assessee to evade excise duty. On the basis of such
material, the Assessing Officer also formed a belief that income
chargeable to tax had also escaped assessment. When thus the Assessing
officer had such material available with him which he perused,
considered, applied his mind and recorded the finding of belief that
income chargeable to tax had escaped assessment, the re-opening could
not and should not have been declared as invalid, on the ground that he
proceeded on the show-cause notice issued by the Excise Department
which had yet not culminated into final order. At this stage the Assessing
Officer was not required to hold conclusively that additions invariably be
made. He truly had to form a bona fide belief that income had escaped
assessment. In this context, we may refer to various decisions cited by
the counsel for the Revenue.
10. In case of Central Provinces Manganese Ore Co. Ltd. v. ITO,
161 : (1991) 59 Taxman 17 the Supreme Court noted that in case of the
assessee which had an office in London, this Customs authority had
come to know that the assessee had declared very low price in respect of
the consignment of Manganese exported by them out of India. After due
inquiries and investigations, the Customs authorities found that the
assessee was systematically under-voicing the value of Manganese as
compared with the prevailing market price. The Income Tax Officer on
coming to know about the proceedings before the Customs Collector in
this respect issued notice for reopening of the assessment. In the reasons
that the Assessing Officer relied on the facts as found by the Customs
Authorities that the assessee had under-voiced goods during export.
Under such circumstances, upholding the validity of the notice for
reopening, the Supreme Court held and observed as under :
“So far as the first condition is concerned, the Income Tax Officer, in his
recorded reasons, has relied upon the fact as found by the Customs
Authorities that the appellant had under invoiced the goods it exported. It
is not doubt correct that the said finding may not be binding upon the
income tax authorities but it can be a valid reason to believe that the
chargeable income has been under assessed. The final outcome of the
proceedings is not relevant. What is relevant is the existence of reasons
to make the Income Tax Officer believe that there has been under
assessment of the assessee's income for a particular year. We are
satisfied that the first condition to invoke the jurisdiction of the Income
Tax Officer under Section 147(a) of the Act was satisfied.”
11. In case of Income Tax Officer v. Purushottam Das Bangur, after
completion of assessment in case of the assessee, the Assessing Officer
received letter from Directorate of Investigation giving detailed
particulars collected from Bombay Stock Exchange which revealed
earning of share and price of share increased during period in question
and quotation appearing at Calcutta Stock Exchange was as a result of
manipulated transaction. On the basis of such information, the Assessing
Officer issued notice for reopening of the assessment. The question,
therefore, arose whether the information contained in the letter of
Directorate of Investigation could be said to be definite information and
the Assessing Officer could act upon such information for taking action
under Section 147(b) of the Act. In such background, the Supreme Court
observed as under:
“12. Ms. Gauri Rastogi, the learned counsel appearing for the
respondents, has urged that the letter of Shri Bagai was received by the
Income Tax Officer on March 26, 1974 and on the very next day, that is,
on March 27, 1974, he issued the impugned notice under Section 147(b)
of the Act and that he did not have conducted any inquiry or
investigation into the information sent by Shri Bagai. Merely because the
impugned notice was sent on the next day after receipt of the letter of
Shri Bagai does not mean that the Income Tax Officer did not apply his
mind to the information contained in the said letter of Shri Bagai. On the
basis of the said facts and information contained in the said letter, the
Income Tax officer, without any further investigation, could have formed
the opinion that there was reason to believe that the income of the
assessee chargeable to tax had escaped assessment. The High Court, in
our opinion, was in error in proceeding on the basis that it could not be
said that the Income Tax Officer had in his possession information on
the basis of which he could have reasons to believe that income of the
assessee chargeable to tax had escaped assessment for the relevant
assessment years. For the reasons aforementioned, we are unable to
uphold the impugned judgment of the High Court. The appeal is,
therefore, allowed, the impugned judgment of the High Court is set aside
and the Writ Petitions filed by the respondents are dismissed. No order
as to costs.”
12. In case of Income Tax Officer v. Selected Dalurband Coal Co. Pvt.
Ltd., the assessment was reopened on the basis of the information
contained in letter from Chief Mining Officer that the colliery of the
assessee had been inspected and there had been under reporting of coal
raised. Upholding the validity of re-opening of assessment, the Supreme
Court held and observed as under:
“After hearing the learned Counsel for the parties at length, we are of the
opinion that we cannot say that the letter aforesaid does not constitute
relevant material or that on that basis, the Income Tax Officer could not
(2021) ABC 341
have reasonably formed the requisite belief. The letter shows that a joint
inspection was conducted in the colliery of the respondent on January
9,1967, by the officers of the Mining Department in the presence of the
representatives of the assessee and according to the opinion of the
officers of the Mining Department, there was under reporting of the
raising figure to the extent indicated in the said letter. The report is made
by a Government Department and that too after conducting a joint
inspection. It gives a reasonably specific estimate of the excessive coal
mining said to have been done by the respondent over and above the
figure disclosed by it in its returns. Whether the facts stated in the letter
are true or not is not the concern at this stage. It may be well be that the
assessee may be able to establish that the facts stated in the said letter are
not true but that conclusion can be arrived at only after making the
necessary enquiry. At the stage of the issuance of the notice, the only
question is whether there was relevant material, as stated above, on
which a reasonable person could have formed the requisite belief. Since
we are unable to say that the said letter could not have constituted the
basis for forming such a belief, it cannot be said that the issuance of
notice was invalid. Inasmuch as, as a result of our order, the
reassessment proceedings have not to go on we don not and we ought not
to express any opinion on the merits.”
13. In case of AGR Investment Ltd. v. Additional Commissioner of
Income Tax and anr, (2016) 1 ITJ Online 803 (Delhi) : (2011) 333 ITR
146 : (2011) 239 CTR 378 : (2011) 197 Taxman 177, a Division Bench
of Delhi High Court considered the validity of reopening of assessment
where the notice was based on information received from Directorate of
investigation that the assessee was beneficiary of bogus accommodation
entries. The Court while upholding the validity of reopening observed
that sufficiency of reason cannot be considered in a writ petition. It was
observed as under:
“23 The present factual canvas has to be scrutinized on the touchstone of
the aforesaid enunciation of law. It is worth noting that the learned
counsel for the petitioner has submitted with immense vehemence that
the petitioner had entered into correspondence to have the documents but
the assessing officer treated them as objections and made a
communication. However, on a scrutiny of the order, it is perceivable
that the authority has passed the order dealing with the objections in a
very careful and studied manner. He has taken note of the fact that
transactions involving Rs. 27 lakhs mentioned in the table in Annexure
P-2 constitute fresh information in respect of the assessee as a
beneficiary of bogus accommodation entries provided to it and
represents the undisclosed income. The assessing officer has referred to
the subsequent information and adverted to the concept of true and full
disclosure of facts. It is also noticeable that there was specific
information received from the office of the DIT (INV-V) as regards the
transactions entered into by the assessee company with number of
concerns which had made accommodation entries and they were not
genuine transactions. As we perceive, it is neither a change of opinion
nor does it convey a particular interpretation of a specific provision
which was done in a particular manner in the original assessment and
sought to be done in a different manner in the proceeding under Section
147 of the Act. The reason to believe has been appropriately understood
by the assessing officer and there is material on the basis of which the
notice was issued. As has been held in Phool Chand Bajrang Lal v. ITO,
436 : (1993) 69 Taxman 627 : (1993) 4 SCC 77, Bombay Pharma
Products v. ITO, (2016) 2 ITJ Online 16 (MP) : (2007) 7 ITJ 500 :
(1999) 237 ITR 614 : (1999) 153 CTR 350 : (1999) 107 Taxman 1 and
Anant Kumar Sahariav. CIT, (2016) 1 ITJ Online 805 (GH), the Court,
in exercise of jurisdiction under Article 226 of the Constitution of India
pertaining to sufficiency of reasons for formation of the belief, cannot
interfere. The same is not to be judged at that stage. In SFIL Stock
Broking Ltd., the bench has interfered as it was not discernible whether
the assessing officer had applied his mind to the information and
independently arrived at a belief on the basis of material which he had
before him that the income had escaped assessment. In our considered
opinion, the decision rendered therein is not applicable to the factual
matrix in the case at hand. In the case of Sarthak Securities Co. Pvt. Ltd.
v. ITO, (2016) 1 ITJ Online 827 (Delhi) : (2010) 329 ITR 110 : (2010)
236 CTR 362 : (2010) 195 Taxman 262, the Division Bench had noted
that certain companies were used as conduits but the assessee had, at the
stage of original assessment, furnished the names of the companies with
which it had entered into transactions and the assessing officer was made
aware of the situation and further the reason recorded does not indicate
application of mind. That apart, the existence of the companies was not
disputed and the companies had bank accounts and payments were made
to the assessee company through the banking channel. Regard being had
to the aforesaid fact situation, this Court had interfered. Thus, the said
decision is also distinguishable on the factual score.”
14. Learned Single Judge of Madras High Court in case of Sterlite
Industries (India) Ltd. v. Assistant Commissioner of Income Tax reported
in (2008) 302 ITR 275 (Mad.) upheld the notice for reopening which was
based on information from enforcement directorate showing possible
inflation of purchases made by the assessee.'
17. In the result, petition is dismissed.
18. All the above observations are only for the purpose of dealing with the
petitioner's challenge to the notice of reopening and would not limit any of the
contentions of the assessee with respect to the reassessment.
______________
(2021) ABC 343

01 ITJ Online Reference File Sarswatji

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

01 ITJ Online Reference File Sarswatji

Uploaded by

Copyright:

Available Formats

(2021) ABC 1

Sir Ratan Tata

Chartered Accountant of the Company certifying satisfaction of the

complementary skill-sets in financial, operational, trading and industrial

The beneficiaries of such discretionary trust are general charities and

have to be rejected, as VTB Bank is itself, through its wholly owned

Other financial services such as deposit business, payment services and

Final outcome – Disposed Off

Donations-S.12(2) of the Income Tax Act, 1961-Reference-S.256 of Income

Final outcome – In favour of Assessee

charitable and religious institutions. We are really surprised at the attitudes of

Final outcome – Appeal Dismissed

(2018) 5 ITJ Online 678 (Bombay)

Final outcome – Appeal Dismissed In favour of Assessee.

and also for the subsequent assessment years.

Final outcome – Appeal Dismissed.

Final outcome – Appeal Dismissed

Act,1961-Held-during the course of the assessment proceedings, the assessee

Final outcome – Appeal Dismissed

(2018) 5 ITJ Online 683 (Rajasthan)

Final outcome – Writ petition Allowed

examination of records revealed that the assessment order so passed is

in the show cause notice and the revisional Order.

Final outcome –Appeal Allowed

Reallocation of administrative 27,74,99,662

Reallocation of Development Cost 1,01,69,860 18,95,26,218

Allocation of Discovery cost of 13,48,79,464 16,53,57,112

Allocation of Capital exp. of R&D 4,34,78,248 5,33,02,684

Exclusion of other income from 6,97,68,075 30,81,029

Deduction claimed u/s. 80G out of 78,30,043 95,35,841

Deduction claimed u/s. 80GGB out 85,78,209 1,04,46,997

Total 27,47,03,899 70,87,49,543

Amount certified by DSIR as expenses incurred outside approved

Clinical Research Expenses 1,214.01

Patent Expenses (Official Fees) outside India 57.32

Patent Expenses (Consultancy Fees) outside India 4,09.41

Interest on Loan 44.72

Labour charges/contract manpower/consultancy charges/retainer

Labour & Job work charges 1,76.32

Fees and Legal Expenses 14.73

Other Studies Expenses 2,01.32

Other expenditure not approved by DSIR

Building related recurring expenses 104.88

Municipal Taxes 12.84

Salary to Dr. C. Dutt 274.19

Employees not having degree in science 338.55

Total [C= (A+B)] 2,938.77

200% of capital expenditure (other than building of Rs. 137.50 275.00

Total amount of Disallowance u/s. 35(2AB) - (C+D) 3,213.77

Patent Expense (Official Fees) 6.78 57.32 64.10

Patent Expense (Consulting Fees) 13.44 409.41 422.85

Professional Fees 81.89 8.59 90.48

Total 102.11 475.32 577.43

Patent Expenses -incurred outside India Para (iii) 466.75 Lakhs

Expenditure on Clinical Research Para (iv) 1214.01 Lakhs

Labour and Job-work charges Para-(v) 176.32 Lakhs

Professional Fees (Rs. 81.89 Lakhs spent in Para-(v) 90.48 Lakhs

Legal Expenses Para-(v) 14.73 Lakhs

Salary Expenses : Para-(v)

Salary to Dr. C. Dutt 274.19 Lakhs

Salary to Employees not having degree in 338.55 Lakhs

(2016) 2 ITJ Online 925 (Trib.- Mum)