Akaant MittalExperts Corner

In the previous two columns, we had covered the position of law on whether a claim for an operational debt or a financial debt could be based on a decree by a court or an arbitral award. The rulings in Dena Bank v. C. Shivakumar Reddy[1], and G. Shivramkrishna v. Isgec Covema Ltd.[2] provide us with the guidance with respect to decree and/or an arbitral award being based on a financial debt and an operational debt respectively.


Now we will proceed with the third and final column in this three-part series.


The issue whether a settlement agreement is sufficient to constitute a financial or an operational debt has a long line of inconsistent rulings.

Settlement Agreement – As a Financial Debt

In Amrit Kumar Agrawal v. Tempo Appliances (P) Ltd.,[3] the financial creditor sought to base its claim of a financial debt against the corporate debtor/guarantor on a memorandum of understanding dated 22-9-2017 wherein the creditor had agreed to advance a loan of Rs 1,50,00,000 to one principal borrower along with with interest @18% per annum payable monthly. As per the MoU, the corporate debtor stood as a guarantor. However, when the cheques of the principal borrower had bounced, a settlement agreement was executed between the creditor and the corporate debtor. The corporate debtor, since was a guarantor had come forward to pay the outstanding amount of Rs 86 lakh with interest calculated at Rs 22 lakh and issued two cheques in consideration of such liability.


The creditor argued that their claim is based on the MoU and not the settlement agreement. The NCLAT (a) firstly held that as per the terms of the settlement agreement, the terms of the memorandum of understanding stood superseded. Then (b) it held that the obligation undertaken by the guarantor to pay Rs 86 lakh with interest calculated at Rs 22 lakh does not satisfy the ingredients of a financial debt, especially when no disbursement is made to the guarantor itself and the principal borrower was not a party to the settlement agreement.

It is submitted that the above ruling is an instance of a hyper-technical understanding of the provisions of the IB Code.


Previously in another ruling, when the debtor failed to comply with the terms of the master restructuring agreement, the appellant debtor pleaded that the terms of the debt stood altered and revised and therefore the element of default was missing. The aforesaid plea was rejected by the NCLAT and the order of admission was upheld.[4]


The position of law that a debt based on a consent decree will not be treated as a financial debt can also be found in context of real estate projects. In Arenja Enterprises (P) Ltd. v. Edward Keventer (Successors) (P) Ltd.,[5] the appellant and its associates entered into MoU about the land followed by two other supplementary MoUs. Later on, some dispute arose between the parties. The appellant, along with its associates filed a civil suit for specific performance along with other reliefs against the corporate debtor. Based on an amicable settled entered into between the parties, the civil suit was decreed where as per the settlement filed before the court, the corporate debtor had agreed to develop a group-housing complex on a plot of land measuring 22.95 acres. Out of this area, the applicant, along with another, was entitled to only 34,000 sq ft residential covered/built-up area along with proportionate super area. Given the terms of settlement if the sanction of plans is not obtained within a maximum period of 3 years from the date of signing of the settlement, in that event, further built-up area as well as liability of additional area would be imposed on the debtor.


Issue arose whether the terms of the consent decree tantamount to a financial debt. The NCLAT opined that in terms of Section 5(8)(f) of the IB Code, the appellant could claim a financial debt only when the amount raised from it as an “allottee” is used for a real estate project. Based on the facts and circumstances, the NCLAT firstly observed that no sum has been raised from an allottee under the real estate project. Then, it found that the financial creditor and its associates have not paid any money towards the allotment of built-up area and the entitlement of the appellant creditor is premised on the terms of settlement. In other words, in the light of the “consent decree and settlement terms”, the appellant had paid nothing in terms of money to the financial creditor and its associates. Resultantly, it was held that the appellant could neither be termed to be an “allottee” nor has any amount “being raised” from the appellant that could constitute to have the effect of a borrowing.


On the other hand, there is the ruling in Mahesh Kumar Panwar v. Neelam Singh[6], where the settlement agreement between the parties formed the basis of financial debt. One of the terms of the settlement agreement stipulated:

In terms of the clauses B and 8 of the earlier valid agreement dated 6-10-2008 entered between the same parties, the first party was to handover the vacant possession of space of about 2004 sq ft on 3rd floor in tower 1 in the proposed IT complex cum corporate hub to be constructed at Plot No. 02/02 situated at Sector – 154, in the name and style “the grid” of the unit duly completed in all respect by 30-6-2011.

It is ascertained and agreed by the first party that till date no construction work has started. Consequent upon the factual position both the parties have agreed for the amicable settlement.

*                                        *                                        *

Both the parties agreed and settled for a sum of Rs 1,34,00,988 (Rupees one crore thirty-four lakhs nine hundred eighty-eight only) which includes booking amount paid, compensation, commitment, services rendered, appreciation, etc.

 The first party has handed over post dated Cheque No. 617815 dated 1-2-2015 amounting to Rs 29,61,261 and Cheque No. 617818 amount to Rs. 1,04,39,727 both drawn at Corporation Bank, Noida total amounting to Rs 1,34,00,988 (Rupees one crore thirty-four lakhs nine hundred eighty-eight only) to the second party in discharge of his liability and post-dated cheques for interest of deferred payment applicable as per the agreement reckoning from 1-6-2014 as per details hereunder:

*                                        *                                       *

Noting the above-mentioned terms, the NCLAT had concluded that there was a disbursal of a sum of Rs 1,34,00,988 which was against the “consideration of time value of money” i.e. interest @12.5% per annum payable from 1-6-2014.


Similarly, in Ludhiana Scrips (P) Ltd. v. K.C. Land & Finance Ltd.[7], the adjudicating authority had dismissed an application under Section 7 of the IB Code on the ground that the creditor did not bring on record the books of accounts with any entry showing any debit of interest in the account of the corporate debtor. The NCLAT, however, overruling the order referred to the settlement agreements[8] entered into between the parties to conclude that the interest element was very much present and the condition of time value of money stood satisfied. Consequently, the NCLAT held that the earlier compromise agreement dated 20-5-2017 and the subsequent agreement dated 15-6-2018 clarify the nature of the transaction and show that the appellant is a financial creditor to whom the respondent owes financial debt, and which is in default.

Clearly, the jurisprudence on this issue is diverging and conflicting.


Settlement Agreement – As an Operational Debt

With respect to an operational debt, the issue came up in Brand Realty Services Ltd. v. Sir John Bakeries India (P) Ltd.,[9] as to whether default of installments under a settlement agreement could be considered as an operational debt under the IB Code. In this case, the debtor had approached the creditor seeking investment and consultancy services and an agreement dated 28-11-2014 was entered into by the parties to that effect. Subsequently, a settlement agreement dated 15-6-2018 was entered into wherein the debtor undertook to clear the dues of the creditor.


Issue arose when the dues were not cleared. The NCLT in this case, firstly opined that the application under Section 9 was filed on account of breach of the terms of the settlement agreement dated 15-6-2018. The NCLT categorically rendered the findings that the claim of the creditor is not based on the invoices raised on account of the agreement dated 28-11-2014.


Consequently, the NCLT then referring to several precedents, including the ruling in Delhi Control Devices (P) Ltd. v. Fedders Electric and Engg. Ltd.[10], held that the debt due in terms of a settlement agreement cannot be considered as an operational debt in terms of Section 5(21) of IB Code and hence unpaid installments under the settlement agreement do not suffice to trigger resolution process against a corporate debtor.



From the three-part series discussion, it is crystal clear that: first, the decree-holder cannot be excluded from the definition of a financial or operational debt; second, an arbitral award may also be sufficient to constitute a financial or operational debt; third, the underlying debt must be based on a transaction that fulfills the criterion of a definitions laid down of financial debt and an operational debt. Lastly, the position with respect to a settlement agreement constituting a financial or an operational debt is still divergent and conflicting.

± Akaant Kumar Mittal is an advocate at the Constitutional Courts, and National Company Law Tribunal, Delhi and Chandigarh. He is the author of the commentary “Insolvency and Bankruptcy Code – Law and Practice.

[1] (2021) 10 SCC 330.

[2] 2020 SCC OnLine NCLAT 909.

[3] 2020 SCC OnLine NCLAT 1202.

[4] Esther Malini Victor v. Oriental Bank of Commerce, 2019 SCC OnLine NCLAT 1107.

[5] 2020 SCC OnLine NCLAT 1188.

[6] 2018 SCC OnLine NCLAT 596.

[7] 2019 SCC OnLine NCLAT 355.

[8] Ludhiana Scrips (P) Ltd. v. K.C. Land and Finance Ltd., 2019 SCC OnLine NCLAT 355, para 9 reproduces one of the agreements dated 15-6-2018 wherein one of the clauses of the agreement purported:

A company winding petition was filed before the Punjab and Haryana High Court by Part 1 against Part 2 which is pending adjudication.

There after it was agreed between the parties that Part 2 i.e. K.C. Land & Finance Ltd will pay Rs 4.40 crores as principal amount and Rs 1.60 crores as interest. An agreement was executed between the parties on 20-5-2017 and various post dated cheques were issued.

… Part 2 i.e. M/s K.C. Land and Finance Ltd. undertakes and assures that all these cheques will be honoured in the event of default Part 1 will be at liberty to enforce this agreement by way of initiating legal proceedings against Part 1 and the amount recoverable will be with interest @18% from the date of default till the realisation of the full amount. (emphasis added)

[9] 2020 SCC OnLine NCLT 6066.

[10] 2019 SCC OnLine NCLT 8030.

Legislation UpdatesStatutes/Bills/Ordinances

The Ministry of Finance has passed the Taxation Laws (Amendment) Act, 2021 on August 13, 2021. The Act amends the Income Tax Act, 1961 and the Finance Act, 2012.

Key amendments under the Act are:

Levy of Tax on income earned from the sale of shares outside India: 

Under the Income Tax Act, 1961 the non-residents are required to pay tax on the income accruing through or arising from any business connection, property, asset, or source of income situated in India. The Finance Act, 2012 amended the Income Tax Act, 1961 and clarified that if a company is registered or incorporated outside India, its shares will be deemed to be or have always been situated in India if they derive their value substantially from the assets located in India.  As a result, the persons who sold such shares of foreign companies before the enactment of the Finance Act, 2012, also became liable to pay tax on the income earned from such sale. The Taxation Laws (Amendment) Act, 2021, omits this tax liability if following conditions are met:

  1. An appeal or petition filed in this regard must be withdrawn or the person must submit an undertaking to withdraw it
  2. The notices or claims under such proceedings must be withdrawn or the person must submit an undertaking to withdraw them
  3. The person should submit an undertaking to waive the right to seek or pursue any remedy or claim in this regard, which may otherwise be available under any law in force or any bilateral agreement.

The Act prescribes that if all the above conditions are fulfilled by the concerned person, then all the assessment or reassessment orders issued with respect to such tax liability will be deemed to have never been issued. Also, if a person becomes eligible for refund after fulfilling these conditions, the amount will be refunded to him, without any interest.

*Tanvi Singh, Editorial Assistant has reported this brief.

Foreign LegislationLegislation Updates

New York Department of Tax and Finance has issued a new guidance on Pass through Entity Tax on August 25, 2021. The PTET is tax that partnerships or New York S corporations may annually elect to pay on certain income for tax years beginning on or after January 1, 2021.


Key points of the guidance are:

  • For 2021, the election must be made by October 15, 2021 and once made it is irrevocable for the year. From 2022 onwards, the annual election must be made by March 15 of the year for which the election is made.
  • Electing entities will have the option to make estimated tax payments prior to December 31, 2021. An online form will be made available for this purpose by December 15, 2021.
  • A direct partner, member, or shareholder eligible to claim the credit means one to whom the electing entity issues a federal Schedule K-1.
  • The guidance states that a partnership cannot include in its PTE taxable income amounts distributed to direct partners, such as partnerships or other entities that are not subject to PIT, even if the income is ultimately taxable to a partner or member through tiered partnerships.
  • The PTE credit must be claimed on the owner’s separate New York State tax returns; it cannot be claimed on a group return.
  • Owners who are New York State residents are also allowed a resident tax credit for “substantially similar” PTE taxes imposed by other states and localities. The Department says it will post on its website a list of substantially similar taxes that qualify for a resident tax credit.

*Tanvi Singh, Editorial Assistant has reported this brief.

Business NewsHot Off The PressNews

Legal Entity Identifier

The Legal Entity Identifier (LEI) is a 20-digit number used to uniquely identify parties to financial transactions worldwide. It was conceived as a key measure to improve the quality and accuracy of financial data systems for better risk management post the Global Financial Crisis.

 LEI has been introduced by the Reserve Bank in a phased manner for participants in the over the counter (OTC) derivative and non-derivative markets as also for large corporate borrowers.

It has now been decided to introduce the LEI system for all payment transactions of value ₹50 crore and above undertaken by entities (non-individuals) using Reserve Bank-run Centralised Payment Systems viz. Real-Time Gross Settlement (RTGS) and National Electronic Funds Transfer (NEFT).

In preparation for the wider introduction of LEI across all payment transactions, member banks should:

  1. advise entities who undertake large value transactions (₹50 crore and above) to obtain LEI in time, if they do not already have one;
  2. include remitter and beneficiary LEI information in RTGS and NEFT payment messages (details of the identified fields in the messaging structures of RTGS and NEFT for inclusion of LEI information are at Annex);
  3. maintain records of all transactions of ₹50 crore and above through RTGS and / or NEFT.

Entities can obtain LEI from any of the Local Operating Units (LOUs) accredited by the Global Legal Entity Identifier Foundation (GLEIF), the body tasked to support the implementation and use of LEI. In India, LEI can be obtained from Legal Entity Identifier India Ltd. (LEIL) (https://www.ccilindia-lei.co.in), which is also recognised as an issuer of LEI by the Reserve Bank under the Payment and Settlement Systems Act, 2007.

These directions are issued under Section 10 (2) read with Section 18 of Payment and Settlement Systems Act, 2007 (Act 51 of 2007) and shall be effective from April 1, 2021.

Reserve Bank of India

[Press Release dt. 05-01-2020]

Hot Off The PressNews

Cooling Period

To inculcate discipline and encourage the submission of applications by serious players as also for effective utilisation of regulatory resources, it has been decided to introduce the concept of Cooling Period in the following situations –

  1. Authorised Payment System Operators (PSOs) whose Certificate of Authorisation (CoA) is revoked or not-renewed for any reason; or
  2. CoA is voluntarily surrendered for any reason; or
  3. Application for authorisation of a payment system has been rejected by RBI.
  4. New entities that are set-up by promoters involved in any of the above categories; definition of promoters for the purpose, shall be as defined in the Companies Act, 2013.

The Cooling Period shall be for one year from the date of revocation / non-renewal / acceptance of voluntary surrender/rejection of the application, as the case may be. In respect of entities whose application for authorisation is returned for any reason by RBI, condition of Cooling Period shall be invoked after giving the entity an additional opportunity to submit the application.

During the Cooling Period, entities shall be prohibited from submission of applications for operating any payment system under the PSS Act.

Reserve Bank of India

[Notification dt. 04-12-2020]

Case BriefsHigh Courts

Orissa High Court: S.K. Paigrahi, J., while addressing a matter, observed that,

One cannot lose sight of the fact that GST regime is relatively new and is still evolving.

“…attempts to dampen the spirit of GST proper implementation are already assuming huge proportions and need to be curbed with an iron fist so that the contours of fiscal compass will be extended to the advantage of the people.”

Petitioner filed the bail application under Section 439 of the Criminal Procedure Code, 1973 for being punishable under Section 132(1)(b)(c) and (1) of the OGST Act, 2017.

Business transactions were made using several fictitious firms including G.S Unitrade,  G.S. Steels and Alloys Co., B.B Associates, Om Shri Ganesh Traders. Petitioner, Ronak Beriwal, Subhash Chandra Swain and Basanta Kumar are the proprietors of GS Unitrade, G.S. Steels & Alloys Co, B.B. Associates and Omm Shree Ganesh Traders respectively.

Above persons, individually and in collusion with each other alleged to have created several dummy and non-existent entities to avail bogus Input Tax Credit (ITC), for the purpose of defrauding the Revenue.


Creation of dummy and non-existent firms was the matter of concern.

Fake and fraudulent transactions have, among others, caused huge loss to the State exchequer at least to the tune of Rs 122.67 crores.


After intensive analysis of data from GSTN/e-way bill portal and inputs from various sources, the Joint Commissioner of State Tax, CT & GST Enforcement Range, Sambalpur detected the fraud committed by the accused.

Several incriminating documents, containing business transactions of such business entities, were unearthed and seized.

Petitioner, in his capacity as the proprietor of G.S. Unitrade, had shown to have purchased goods from many bogus firms and has availed ITC on the strength of fake invoices, without actual transfer of goods.

“…manner in which the accused, in collusion with other accused, had been operating would suggest that there are certain inherent flaws in the GST system, which is prone to such abuse.”

“Fraudsters are taking advantage of the inadequacy of electronic trails of all transactions by employing ingenious methods.”

The search and inspection conducted by the State Authorities revealed that no business was actually being conducted by the declared place of business.

Fictitious firms were created in the name of many daily labourers, private tutors, housewives etc., with the help of their identity documents like PAN, Aadhaar Card, Mobile phone, Voter Card, etc.

Hence accused was alleged to have committed of offences under Section 132(1)(i) read with Section 132(5) of the OGST Act, 2017, which are a non-bailable and cognizable.


In the instant case, the alleged GST fraud committed by the petitioner is having humongous ramification on the revenue collection by the State.

Further the bench added that, the possibility of the accused tampering the evidence and/or influencing/intimidating the witnesses also cannot be ruled out.

Moreover, the Courts cannot lose sight of the adverse impact such activities would have in the economy.

Bench stated that a large number of cases emerged in different parts of the country where such persons, with vested interests, have created a host of unscrupulous and bogus entities.

Fake entities are then used for the purpose of indulging in issuances of false and fabricated invoices, without actual movement or supply of goods and services and without payment of any GST to the public exchequer, but for the purpose of claiming ITC, by defrauding the Revenue.

Enormity of such devious activities touch the raw nerve of the economic system and strike at the root of the proper and effective functioning of the GST regime, which has been set up with the laudable object of “One Nation, One Tax, One Market”.

High Court stated that a countrywide cartel specializing in defrauding the GST system is operating to bring the economy to its knees.

High Court declined the release of the accused petitioner on bail at this stage. Accordingly, the bail petition filed on behalf of the accused/petitioner was rejected. [Amit Beriwal v. State of Odisha, 2020 SCC OnLine Ori 546 , decided on 27-07-2020]

COVID 19Legislation UpdatesNotifications

In view of the challenges faced by taxpayers in meeting the statutory and regulatory compliance requirements across sectors due to the outbreak of Novel Corona Virus (COVID-19), the Government brought the Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020 [the Ordinance] on 31st March, 2020 which, inter alia, extended various time limits. 

In order to provide further relief to the taxpayers for making various compliances, the Government has issued a Notification on 24th June, 2020, the salient features of which are as under:

I. The time for filing of original as well as revised income-tax returns for the FY 2018-19 (AY 2019-20) has been extended to 31st July, 2020.

II. Due date for income tax return for the FY 2019-20 (AY 2020-21) has been extended to 30th November, 2020. Hence, the returns of income which are required to be filed by 31st July, 2020 and 31st October, 2020 can be filed upto 30th November, 2020. Consequently, the date for furnishing tax audit report has also been extended to 31st October, 2020.

III. In order to provide relief to small and middle class taxpayers, the date for payment of self-assessment tax in the case of a taxpayer whose self-assessment tax liability is upto Rs. 1 lakh has also been extended to 30th November, 2020. However, it is clarified that there will be no extension of date for the payment of self-assessment tax for the taxpayers having self-assessment tax liability exceeding Rs. 1 lakh. In this case, the whole of the self-assessment tax shall be payable by the due dates specified in the Income-tax Act, 1961 (IT Act) and delayed payment would attract interest under section 234A of the IT Act.

IV. The date for making various investment/ payment for claiming deduction under Chapter-VIA-B of the IT Act which includes section 80C (LIC, PPF, NSC etc.), 80D (Mediclaim), 80G (Donations) etc. has also been further extended to 31st July, 2020. Hence the investment/ payment can be made upto 31st July, 2020 for claiming the deduction under these sections for FY 2019-20.

V. The date for making investment/ construction/ purchase for claiming roll over benefit/ deduction in respect of capital gains under Sections 54 to 54GB of the IT Act has also been further extended to 30th September, 2020. Therefore, the investment/ construction/ purchase made up to 30th September, 2020 shall be eligible for claiming deduction from capital gains.

VI. The date for commencement of operation for the SEZ units for claiming deduction under section 10AA of the IT Act has also been further extended to 30th September, 2020 for the units which received necessary approval by 31st March, 2020.

VII. The furnishing of the TDS/ TCS statements and issuance of TDS/ TCS certificates being the prerequisite for enabling the taxpayers to prepare their return of income for FY 2019-20, the date for furnishing of TDS/ TCS statements and issuance of TDS/ TCS certificates pertaining to the FY 2019-20 has been extended to 31st July, 2020 and 15th August, 2020 respectively.

VIII. The date for passing of order or issuance of notice by the authorities and various compliances under various Direct Taxes & Benami Law which are required to be passed/ issued/ made by 31st December, 2020 has been extended to 31st March, 2021. Consequently, the date for linking of Aadhaar with PAN would also be extended to 31st March, 2021.

IX. The reduced rate of interest of 9% for delayed payments of taxes, levies etc. specified in the Ordinance shall not be applicable for the payments made after 30th June, 2020.

The Finance Minister has already announced extension of date for making payment without additional amount under the “Vivad Se Vishwas” Scheme to 31st December 2020, necessary legislative amendments for which shall be moved in due course of time. The said Notification has extended the date for the completion or compliance of the actions which are required to be completed under the Scheme by 30th December, 2020 to 31st December, 2020. Therefore, the date of furnishing of declaration, passing of order etc under the Scheme stand extended to 31st December, 2020.

Deferment of the implementation of new procedure for approval/ registration/ notification of certain entities u/s 10(23C), 12AA, 35 and 80G of the IT Act has already been announced vide Press Release dated 8th May, 2020 from 1st June, 2020 to 1st October, 2020. It is clarified that the old procedure i.e. pre-amended procedure shall continue to apply during the period from 1st June, 2020 to 30th September, 2020. Necessary legislative amendments in this regard shall be moved in due course of time.

The Finance Minister has already announced reduced rate of TDS for specified non-salaried payments to residents and specified TCS rates by 25% for the period from 14th May, 2020 to 31st March, 2021. The announcement was also followed by the Press Release dated 13th May, 2020. The necessary legislative amendments in this regard shall be moved in due course of time.

Ministry of Finance

[Press Release dt. 25-06-2020]

Conference/Seminars/LecturesLaw School News

SSIP Cell, Government of Gujarat in collaboration with GNLU Legal Incubation Council (GLIC) has organized a Seminar on  “Finance for Start-Ups”  dated 30-01-2019 (Wednesday) during 5:00 p.m. to 7:00 p.m. at SSIP-Hub, Knowledge Consortium of Gujarat (KCG) Campus, Ahmedabad.
August Speaker: Dr. Mahesh Chaudhary
For registration, click HERE
Legislation UpdatesStatutes/Bills/Ordinances

Parliament passed the Finance Bill, 2014 (35 of 2014) which was introduced in Lok Sabha on July 10, 2014 and the said Bill awaits President’s assent. Some of the key proposals made in the Bill are as follows:

  • In provisions related to power of calling for information, addition of a new provision that prescribes the income-tax authority to issue a notice to the individual requiring him to furnish information or documents for the purposes of verification of information in its possession related to him.
  • Insertion of provision to mandate every business trust to furnish income tax returns.
  • Introduction of provisions creating an obligation for furnishing statement of financial transactions or reportable account along with the introduction of a penalty provision in case inaccurate statements are produced.
  • Under the Bill, the Excise Commissioner will not entertain any appeal unless the appellant deposits seven and a half percent of the duty demanded or penalty imposed or both, in pursuance of a decision or an order passed by an officer of Central Excise lower in rank than the Commissioner of Central Excise.
  • Amendment of certain sections of Finance Act, 1994 dealing with imposition of Service Tax, the authorities thereof and penalties related to Service tax.
  • Substitution of new Authorities under the Income Tax Act.
  • Deduction of fifteen percent to companies engaged in the business of manufacture or production of any article or thing, acquiring and installing new assets and the amount of actual cost of such new assets during any previous year exceeds twenty-five crore rupees.
  • Determination or specification of the arm’s length pricing in relation to the international transaction entered into by the person.

To read the Bill, click here