Income Tax Appellate Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal (ITAT): While deciding the instant appeal wherein the relevant question arose that whether the interest paid on late payment of TDS after deduction can be claimed as expenditure for determining the taxable income; the Bench of A.D. Jain (Vice President) and Dr B.R.R Kumar (Accountant Member) examined the issue of allowability as per the provisions of Income Tax Act and various judicial pronouncements. The Bench held that interest payment on late payment of TDS is not eligible business expenditure for deduction and it is not compensatory in nature. Payment of interest on late deposit of TDS levied under Section 201(1-A) is neither an expenditure only and exclusively incurred for the purpose of the business and therefore the same is not allowable as deduction u/s 37(1) of the Act.

Facts of the case: The assessee via its letter dated 12-03-2015 submitted copy of ledger account of interest on TDS. The assessee itself agreed that interest on TDS amounting to Rs. 9,70,248 was not added back in the computation of income. Interest on TDS is not allowable as per provision of Income Tax Act, 1961. Accordingly, expenses of Rs. 9,70,248 were disallowed and added back to the income of the assessee.

Observations: The Tribunal considered the question of allowability notwithstanding the contentions of the assessee before the Revenue. Some of the salient observations made by the Bench are as follows-

  • Section 201(1-A) of the Income Tax Act mandates assessee to pay simple interest at 1.5% per month or part of the month in case of delay in remittance of TDS amount deducted, to the treasury of the Central Government. For claiming expenditure and arriving at the taxable income, the Income Tax Act states twin conditions – allowance of expenditure as per Sections 30 to 37 and non-allowable expenditure as per Sections 40, 43B. The same are applicable for claiming the interest paid on late remittance of TDS.

  • Interest as defined in Section 2(28A) of Income Tax Act means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized. Section 36(1)(iii) of the Act provides deduction of the interest paid in respect of capital borrowed for the purpose of the business or profession.

  • Interest on late payment of TDS is not covered under Sections 30-36 of the Act and thus qualifies for consideration under Section 37. It is neither capital expenditure nor personal expenditure of the Assessee. The Tribunal pointed out that Courts have time and again held that interest expenses on late payment of taxes which are compensatory in nature, should be treated as expended wholly and exclusively for the purposes of the business or profession, since responsibility of payment of taxes including deduction and remittance of TDS is part and parcel of the business operations and the assessee has no right to utilize such monies collected from others on behalf of the government.

  • The Tribunal relied on the judicial pronouncements of Lachmandas Mathuradas v. CIT, (2002) 254 ITR 799; Commissioner of Income-Tax v. Chennai Properties and Investment Ltd., 1998 SCC OnLine Mad 1095; Velankani Information Systems Ltd. v. CIT, 2018 SCC OnLine ITAT 17731 wherein the issues vis-à-vis disallowance of interest on TDS payments were addressed. The Tribunal observed that, “Payment of interest takes colour from the nature of the levy with reference to which such interest is paid and the tax required to be but not paid in time, which renders the assessee liable for payment of interest was in the nature of a direct tax and similar to the income-tax payable under the Income Tax Act. The interest paid under Section 201(1A) of the Act, therefore, would not assume the character of business expenditure and cannot be regarded as a compensatory payment”.

[Universal Energies Ltd. v. DCIT, ITA No. 2761/Del/2018, decided on 26-07-2022]


Advocates appearing in the case

Assessee by: Sudesh Garg, Adv. and Sahil Aggarwal, CA

Revenue by:  K. A. Manu, Sr. DR


*Sucheta Sarkar, Editorial Assistant has prepared this brief.

 

 

Jharkhand High Court
Case BriefsHigh Courts

   

Jharkhand High Court: Sanjay Kumar Dwivedi, J. allowed a criminal miscellaneous petition quashing the entire criminal proceeding including the order dated 08-12-2017, passed by the Special Judge, Economic Offences, Dhanbad, whereby cognizance had been taken against the petitioners for the offences under Sections 276(B) and 278(B) of the Income Tax Act, 1961 pending in the Court of Special Judge, Economic Offences, Dhanbad.

Facts of the case:

The complainant, Assistant Commissioner, Income Tax Department stated that accused 1 (petitioner1) is a joint venture company represented through its principal officer i.e., accused 2 (petitioner 2) and is carrying business of power generator in the name “Maithon Power Limited”.

It is a private limited company registered under the Companies Act and derived Income from business of generating power and is an assessee within the meaning of Income Tax Act. Being a principal officer as per Section 2(35) of the I. T. Act of accused 1, the accused 2 was liable and responsible to the company for the conduct of the business of the company.

The accused 2 for and on behalf of accused 1, being a principal officer of accused 1, deducted TDS amount, amounting to Rs. 8,22,23,551/- for F.Y.-2012-13 but failed to credit the same to the account of Central Government of India, TDS Ward Dhanbad. The complainant contended that the accused 2 deliberately, intentionally, knowingly, willingly and having mens rea in his mind failed, neglected and avoided to deposit the same in time to the credit of Central Government account without reasonable cause rather converted the aforesaid amount into their own use for their wrongful gain and for wrongful loss to the Central Government. A show cause notice was issued and served upon the accused in response to which he filed a letter which had no leg to stand.

Finally sanction to launch a prosecution U/s 276-B r/w Section 278-B of the I. T. Act against the accused persons was sent to Commissioner of Income Tax, TDS Ward, Patna. Considering all the facts and circumstances with due care and caution he applied his judicial mind and opined that a prima facie case is made out under section 276-B r/w Section 278-B of the I. T. Act.

Contentions:

Counsel appearing for the petitioners submitted that the TDS amount in question was received by the company in the month of February, 2013 and in terms of Rule-30 of the Income Tax Rules, 1962, it is required to be deposited in terms of Rule-30(2)(B), as such, the amount was required to be deposited on or before 07-03-2013, however, the same was credited in the account of Income Tax Department on 08-03-2013. He further submitted that for the delay of one day in payment of TDS amount, the interest has also been paid to the department, which is also an admitted fact. By way of referring Section 95 of the Penal Code 1860, he submitted that in view of that Section, if the harm is so slight, no person of ordinary sense and temper would complain of such harm. He further submitted that in light of Section 202 Criminal Procedure Code, 1973, the summon was not required to be issued so far as petitioner 2 is concerned, who was stationed at Mumbai. Relying on case laws he submitted that the complainant has not disclosed in the complaint as to how the petitioner 2 was overall in-charge. He finally submitted that the entire criminal proceedings including the order of taking cognizance were fit to be quashed.

Counsel appearing for the Income Tax Department submitted that whatever has been argued by the counsel appearing for the petitioners can be looked into only in the trial. She further submitted that the there is no delay of one day rather there was delay of two months in crediting the T.D.S. stating that period of delay is counted from the date of deduction of the TDS and not from the date of deposit of the TDS, as per the CBDT guidelines. She further submitted that paying the interest is civil liability, whereas the TDS amount, which has not been deposited by the petitioner is a criminal liability, for which, he has been called to face the prosecution under the relevant Sections of the Income Tax Act.

Findings:

The Court went through the materials available on record and it was noted that the charts enclosed by the General Manager, CSD, State Bank of India disclosed the time of transaction. On perusal of the said chart, it transpired that the TDS credit transaction was initiated between 10.00 P.M. to 11. 00 P.M. and the first initiation was also done in the evening and for the transaction between 10.00 P.M. to 11. 00 P.M on 07-03-2013, the status description discloses ‘completed successful.' Meaning thereby that the petitioners had taken steps within time, however, the same was credited in the account of the Central Government on 08-03-2013. It was further noted that interest of one day had also been paid.

The Court was of the opinion that looking at Rule-30(2)(B) of the Income Tax Rules and the Bank document, it transpires that the liability cannot be fastened upon the petitioners on the ground that the initiation of payment of TDS shall not be taken at the right time. The Court relied on Ravi Thapar v. Madan Lal Kapoor, (2013) 3 SCC 330 and came to a conclusion that the documents of the State Bank of India can be looked into by this Court, sitting under Section 482 Cr.P.C. The court further stated that the Magistrate was required to follow the mandatory provision of Section 202 Cr.P.C., which has been amended in the year 2005 making it mandatory to postpone the issue of process, where the accused is not residing within the territorial jurisdiction of the magistrate concerned.

The Court further relying on Girdhari Lal Gupta v. D.H. Mehta, (1971) 3 SCC 189 and Dayle De'souza v. Government of India, 2021 SCC Online SC 1012 held that the petition does not disclose as to how petitioner 2 is overall in-charge of the business reproducing Section 278(B) of the Income Tax Act.

The Court consequently quashed the entire criminal proceeding including the order Special Economic Offices against the petitioners and allowed the criminal miscellaneous petition.

[Maithon Power Limited v. State of Jharkhand, Cr.M.P. No. 2193 of 2018, decided on 14-02-2022]


Advocates who appeared in this case :

Pandey Neeraj Rai, Rohit Ranjan Sinha, Akchansh Kishore, Pradymna Poddar, Advocates, for the Petitioners;

Bhola Nath Ojha, Advocate, for the State;

Amrita Sinha, Advocate, for the Income Tax Department.


*Suchita Shukla, Editorial Assistant has reported this brief.

Allahabad High Court
Case BriefsHigh Courts

Allahabad High Court: Rajesh Singh Chauhan, J. allowed a bail application in a case registered under sections 376, 506 Penal Code, 1860 and sections 5,6 of POSCO Act, 2012.

Counsel for the applicant submitted that this is a case of love affair. Even as per the prosecution story so narrated in the F.I.R. she had gone to Ludhiyana with the present applicant willingly where the present applicant established physical relation on the promise of marriage. Attention was drawn towards the statement of prosecutrix recorded under section 161 and 164 Criminal Procedure Code, 1973 wherein she had not leveled any allegation against the present applicant. She did not support the prosecution version rather submitted that she was willingly living with the present applicant. Their relation were consensual. They got married without informing their family members. She subsequently conceived and was blessed with a male child. It was further submitted that presently the prosecutrix was living with the family members of the applicant and she does not want to go to the place of her parents.

However, State Counsel opposed the bail application on the point that since the age of the present applicant at the time of incident was below 18 years, to be more precise, around 15 years and one month on the basis of statement of the Principal of the institution where the prosecutrix was studying. Therefore, such consent of prosecutrix is meaningless in the eyes of law and the present applicant should not be released on bail.

The Court was pained to observe the fact that a children of tender age who have not attained the age of majority are indulging in such type of relations which may not be said to be a proper relation. When a certain age has been prescribed by the statute to get married and live accordingly, any such act which has been committed prior to such age cannot be approved. The age of 15-16 years or below 18 years is not the age where any young couple should enter into the institution of marriage.

The Court however opined that in the present circumstances wherein the present applicant and prosecutrix have not only got married but they are having infant son from said wedlock and it is the responsibility of the couple to look after his child properly, it would be only just to release the applicant from jail otherwise there might be a possibility that his minor wife with his son might not be taken care of properly by his parents.

The Court allowed the bail application with certain directions considering the larger interest of the child and mother who should have been taken care of by the present applicant.

[Suraj v. State of U.P., 2022 SCC OnLine All 485, decided on 27-05-2022]


Advocates who appeared in this case :

Ram Pukar Singh, Advocate, Counsel for the Applicant;

Dr Gyan Singh ,Shiv Charitra Tiwari, Advocates, Counsel for the Opposite Party.


*Suchita Shukla, Editorial Assistant has reported this brief.

Customs, Excise and Services Tax Appellate Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

Customs, Excise and Services Tax Appellate Tribunal (CESTAT): The Division Coram of Sulekha Beevi C.S. (Judicial Member) and P. Anjani Kumar (Technical Member) allowed two appeals (with same issue involved) which were filed aggrieved by the order of original authority. The Tribunal answered that ocean freight charges are not subject to levy of Service Tax under Business Support Services or Business Auxiliary Services.

The appellant is a freight forwarder and is engaged in freight forwarding of import and export shipments. They also collect ocean freight charges from their customers and pay the same to shipping lines/ shipping companies. The appellant did not discharge any service tax on the ocean freight charges. The Department was of the view that the appellant is liable to pay service tax on the ocean freight charges collected by them as these falls under Business Support Services, the second appeal alleged that the appellant, which is a SEZ unit, is not eligible for refund/credit in respect of the input services because the services are not physically consumed within the SEZ unit. Consequently, show cause notices were issued to the appellant, proposing to demand service tax on these two issues. Original authority had confirmed the demand along with interest and imposed penalty. Thus, the instant appeal was filed.

Counsel on behalf of the appellant argued that the demand has been confirmed on ocean freight charges collected by the appellant alleging that the appellant has provided Business Support Services for the period from May 2006 to March 2009. Further, demand of Service Tax of Rs.53,93,244/- has been confirmed alleging that the appellant has wrongly availed the benefit for the period from April 2006 to March 2009. He further submitted that the issue as to whether ocean freight charges collected are subject to levy of Service Tax is no longer res integra.

The Tribunal agreed that the first issue that as to whether the charges collected by the appellant from its customers in the nature of ocean freight are subject to levy of Service Tax under Business Support Services has been considered in various decisions of the Tribunal wherein the Tribunal has held that ocean freight charges are not subject to levy of Service Tax under Business Support Services or Business Auxiliary Services reproducing the case of Greenwich Meridian Logistics India Pvt. Ltd. v. CST, 2016 (43) S.T.R. 215 (Tri.-Mumbai). The Tribunal further followed the decisions relied upon by the counsel of the appellant to hold that the demand of Service Tax on ocean freight charges cannot sustain and requires to be set aside.

Dealing with second issue of demand of Service Tax alleging that the benefit of exemption is not eligible as the input services / approved services have not been consumed within the SEZ unit itself the Tribunal relied on the case of Vision Pro Event Management v. Commr. of C.E. & S.T., 2019 (365) E.L.T. 555 (Tri.—Chennai) and other cases relied on by the counsel for the appellant and concluded that the demand of Service Tax alleging that the appellant has wrongly availed the benefit cannot sustain and requires to be set aside. The appeals were thereby allowed.

[Geodis Overseas (P) Ltd. v. Commr. of ST, 2022 SCC OnLine CESTAT 430, decided on 24-06-2022]


Advocates who appeared in this case :

Shri Raghavan Ramabadran, Advocate, for the Appellant;

Smt K. Komathi, Authorized Representative, Advocate, for the Respondent.


*Suchita Shukla, Editorial Assistant has reported this brief.

Legislation UpdatesNotifications

On 04-07-2022, the Central Consumer Protection Authority (‘CCPA’) has issued Guidelines to prevent unfair trade practices and to protect the consumer interest with regard to levy of service charge in hotels and restaurants.

 

Key points:

  • No hotel or restaurant shall add service charge automatically or by default in the bill.
  • Service charge shall not be collected from consumers by any other name.
  • No hotel or restaurant shall force a consumer to pay service charge and shall clearly inform the consumer that service charge is voluntary, optional and at consumer’s discretion.
  • No restriction on entry or provision of services based on collection of service charge shall be imposed on consumers.
  • Service charge shall not be collected by adding it along with the food bill and levying GST on the total amount.
  • If a hotel or restaurant is found levying service charge, a consumer may: –
    1. Make a request to the concerned hotel or restaurant to remove service charge from the bill amount.
    2. Lodge a complaint on the National Consumer Helpline (NCH).
    3. File a complaint against unfair trade practice with the Consumer Commission.
    4. The Complaint can also be filed electronically through e-daakhil portal www.e-daakhil.nic.in for its speedy and effective redressal.
    5. Submit a complaint to the District Collector of the concerned district for investigation and subsequent proceeding by the CCPA. The complaint may also be sent to the CCPA by e-mail at com-ccpa@nic.in.

Case BriefsHigh Courts

Calcutta High Court: Amrita Sinha, J. disposed of a petition which was filed by an Assistant Teacher who retired from service on 31-10-2020 regarding delayed payment of the gratuity and arrear pension amount.

The grievance of the petitioner was that the Pension Payment Order was issued on 28-02-2022 and the gratuity and arrear pension amount was disbursed on 11-03-2022. The petitioner claims interest on delayed payment of the gratuity and arrear pension amount.

The Court stated that it is settled law that the right of a retired employee to get his retiral dues on the date of attaining superannuation is a valuable right which accrues in his favour on the date of his attaining superannuation. Further, gratuity and pension are no more considered to be a bounty to be handed out by the State at its whim. If payment of such gratuity and pension is delayed the retired employee is surely entitled to get some interest for such delayed payment.

The Court opined that in the present case it was the bounden duty of the State to disburse the gratuity and pension amount on the due date. If it has failed to do so and has released such amount after unexplained delay, it is obliged to pay interest to the retired employee.

The Court directed the concerned Treasury Officer to pay interest to the writ petitioner at the rate of 5% per annum on the gratuity and arrear pension calculated on and from the due date till the date of actual payment, provided the delay caused was not attributable to the petitioner.[Pranesh Kumar Kar v. State of West Bengal, 2022 SCC OnLine Cal 1371, decided on 19-05-2022]


Mr Sudipa Biswas : for the Petitioner

Mr Debasish Basu : for the State


Suchita Shukla, Editorial Assistant has reported this brief.

Customs, Excise and Services Tax Appellate Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

Customs, Excise and Services Tax Appellate Tribunal (CESTAT): Ramesh Nair (Judicial Member) partly allowed an appeal which raised the question as to whether the appellant was entitled to Cenvat credit in respect of Input Services namely construction services, fee for architectural structural works for factory plant building, group Medi-claim Insurance, Group personal accident insurance, insurance, motor car/vehicle insurance, labour charges for installation, testing & commissioning of components of VRV System (Centrally AC system) in the office building etc.

Superintendent (AR) appearing on behalf of the Revenue submitted that the Construction and Architectural services are related to construction which is excluded in the definition of Input Services, therefore, the same was not admissible.

The Tribunal after considering the submissions found that right from the beginning the appellant was taking a stand that construction and architectural services are used for the repair and renovation of factory. This submission of the appellant was not effectively rebutted by the Revenue and the Cenvat credit was denied by the lower authorities on the ground that construction service is excluded and appearing in the exclusion clause thus the credit on Construction and Architectural services was denied. The credit in respect of group Medi-claim Insurance, Group personal accident insurance, insurance, motor car/vehicle insurance etc. were denied on the ground these services have no nexus with the manufacturing of excisable goods.

In regards to Construction and Architectural services the Tribunal found that as per various judgments only such construction services which are used in the initial setting up of the factory are excluded. However, in the present case, the factory was already existing and this construction and architectural service were used for the repair and renovation of the existing factory plant. As per the inclusion clause of definition of Input Services, repair and renovation/ modernization is specifically included in the inclusion clause. Therefore, construction or architectural service if used for the initial set up of plant will only be ineligible for Cenvat credit. Whereas as per facts in the present case, the services were used for repair and renovation hence, the credit in terms of the inclusion clause of Input Service is admissible.

In regards to other services, the Tribunal found that these are the services as mandated as per the factory Act for the safety of employees. Therefore, this cannot be said that the services were used for personal use.

The Tribunal cited certain cases where it was established that Cenvat credit is allowed on Insurance Services. The Tribunal was of the view that the appellant is entitled to the Cenvat credit on such services. However, the appellant has admittedly paid an amount of Rs. 2,29,752/- which stands upheld. The appellant had only disputed the amount of Rs. 5,72,011/-. Therefore the same along with penalty and interest were set-aside. As regards the interest and penalty in respect of amount admittedly paid for Rs. 2,29,752/-, it was observed that since the appellant had not utilized the said amount, no interest and penalty corresponding to said amount was payable.[Milestone Preservatives (P) Ltd. v. C.C.E. & S.T., Excise Appeal No. 11905 of 2019-SM, order dated 20-05-2022]


Shri G. Kirupanandan, Superintendent (AR) for the Respondent


Suchita Shukla, Editorial Assistant has reported this brief.

Case BriefsHigh Courts

Gujarat High Court: Biren Vaishnav, J., reiterated that, interest on delayed payment of gratuity is mandatory and not discretionary.

The petitioner had prayed for a declaration that the respondent’s action in not paying the entire amount of Rs 10 lakhs towards gratuity to the petitioner was arbitrary. Hence, a direction was sought that respondents be directed to pay the remaining amount of gratuity to the petitioner along with 18% interest from the date of his retirement.

Analysis and Decision


High Court expressed that, in the Supreme Court decision of H. Gangahanume Gowda v. Karnataka Agro Industries Corpn. Ltd., (2003) 3 SCC 40, it was decided that the interest on delayed payment of gratuity is mandatory and not discretionary. When it is not the case of the respondent that the delay in the payment of gratuity was due to the fault of the employee and that it had obtained permission in writing from the controlling authority for the delayed payment on that ground, the respondent had been directed to pay interest @ 10% on the amount of gratuity to which the appellant is entitled from the date it became payable till the date of payment of the gratuity amount. 

Hence, Bench stated that the present case was covered by the Supreme Court’s decision as stated above.

Therefore, Court directed the respondents to pay the petitioner the amount of gratuity of Rs 10 lakhs within a period of 10 weeks, and since the petitioner was superannuated in 2013 and the gratuity amount had been wrongfully withheld, the petitioner shall be entitled to interest at the rate of 9% from the date of his superannuation till the date of actual payment. [Ashvinkumar Ramniklal Jani v. State of Gujarat, 2022 SCC OnLine Guj 575, decided on 19-4-2022]


Advocates before the Court:

MR JAYRAJ CHAUHAN(2966) for the Petitioner(s) No. 1

MR MUKESH N VAIDYA(5197) for the Petitioner(s) No. 1

MR MUKUND M DESAI(286) for the Petitioner(s) No. 1

MS.SURBHI BHATI, AGP for the Respondent(s) No. 1,2,3

NOTICE SERVED BY DS for the Respondent(s) No. 4

Cyril Amarchand MangaldasExperts Corner

Insolvency and Bankruptcy Code, 2016 (IBC) has been a hot topic since its inception. However, despite it being in force for almost 6 years now, and witnessing innumerable challenges and disputes, there are still some areas which lacks clarity. “Interest” qua debt is one such zone. There has been some discussion around this issue before courts, however, there are still certain nuances that are yet developing. In this blog, we attempt to consolidate the prevalent views on some of such issues. More precisely, the following:

  1. Why is there a distinction in treatment of “interest” qua “financial debt” and “operational debt” under IBC.
  2. Whether “interest” is chargeable on “operational debt”.
  3. Whether “interest” alone would qualify as “operational debt” to maintain insolvency application.
  4. Whether “interest” can be clubbed with principal debt to crossover the threshold limit of INR 1 crore.

 

Distinction in treatment of “interest” under “financial debt” versus “operational debt”

Prior to IBC, financial debt and operational debt were not considered differently for the purpose of initiating winding-up proceedings against a company for its inability to pay debt under the Companies Act.[1] However, with the introduction of IBC, the debts have been classified into two categories, namely, (i) financial debt; and (ii) operational debt. For both these debts, IBC provides for different procedures with corresponding rules and regulations.

 

Amongst many, one relevant distinction between the two debts is in relation to the component of “interest”. The term “financial debt” is defined to include “interest” (if any), while there is no mention of “interest” in the definition of “operational debt”. The definitions are reproduced below:

    1. […]

(8) “financial debt” means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes […]

*          *          *

(21) “operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the [payment] of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority;

 

Although, the distinction in the treatment of “financial” and “operational” debt and creditor has been sufficiently deliberated and upheld by the Supreme Court in the celebrated case of Swiss Ribbons (P) Ltd. v. Union of India[2], the distinction viz. the component of “interest” is not explicitly dealt with yet.

 

Some guidance, however, in this regard may be drawn from the Supreme Court decision in Pioneer Urban Land and Infrastructure Ltd. v. Union of India[3] wherein while classifying home buyers as “financial creditors” and not as “operational creditors”, Supreme Court noted that:

  1. 42. One other important distinction is that in an operational debt, there is no consideration for the time value of money—the consideration of the debt is the goods or services that are either sold or availed of from the operational creditor.

 

Evidently, there is no concept of “time value of money” for a debt to qualify as an “operational debt”, unlike a “financial debt”. Thus, “interest” which may be considered as a factor evidencing “time value of money” against a debt is not a sine qua non for an “operational debt”,[4] justifying absence of the term “interest” from the definition of operational debt.

 

In other terms, “interest” is not necessary for an “operational debt”, as there the consideration is the value of the goods or services sold or availed by the corporate debtor from the operational creditor. Limited relevance it may drawis when payment of the said consideration is delayed beyond a due date, and the “interest” is levied. Such interest, however, is in the form of “penalty” and not a return on investment. Thus, it could be argued that the distinction in definition do hold some rationale.

 

However, this distinction has expansive implications under IBC and has given light to newer issues such as whether “interest” is even chargeable upon an “operational debt”, and if yes, whether such interest is an “operational debt” capable of giving rise to an action under IBC Section 9, or whether can it be clubbed with the principal component of the debt to cross-over the threshold limit of INR 1 crore for filing an insolvency application. Lets see the position of law as it exists today on these issues.

Whether “interest” is chargeable on “operational debt”

There has been a difference in reasoning of different NCLTs in regard to this issue. Some have held it appropriate for “interest” to be charged as default, while others consider it more appropriate if there is a mutual agreement between parties to charge interest.

 

In the case of the former, for e.g. NCLT Mumbai in D.F. Deutsche Forfait AG  v. Uttam Galva Steel Ltd.,[5] observed that there is also some time value of money for an “operational debt” as goods or services are supplied against money as consideration. It observed that it is not expected that delay in payments of consideration beyond time is left uncharged. It is a known fact that the money today will worth less from what it was worth yesterday, and hence, any delay beyond the credit period should entitle the creditor to claim “interest”. NCLT noted that:

“[…] On commercial side, the [operational] creditor claiming interest is quite normal and justifying, after all, business always runs keeping in mind the time value of money […]”

 

Against this, NCLT Chandigarh[6] and Kolkata[7] have aligned more in line with the latter approach and held that it ismust that there is a mutual understanding between the parties for interest to be chargeable and that it cannot be a unilateral act of the creditor. For instance, in Wanbury Ltd. v. Panacea Biotech Ltd.,[8] NCLT Chandigarh held that in absence of an agreement stipulating “interest”, interest is not chargeable. It was observed that IBC does not empower the adjudicating authority to impose interest on the parties, much less determine the rate of such interest.

 

Subsequently, even NCLT Mumbai revisited this question in Vitson Steel Corp (P) Ltd. v. Capacite Infraprojects Ltd.,[9] and united with the latter approach by holding that interest cannot be claimed as an “industry practice” on an operational debt. It held:

 

24. The object of the Code is not advanced by surprising the corporate debtor with a claim for interest firstly by claiming that it was as per industry practice and thereafter making a pitch that it was as per (MSME Act) Micro, Small and Medium Enterprises Development Act, 2006, when the operational creditor was confronted with a question posed by this Bench as to how the claim for interest was sustainable when neither the purchase order nor the invoices carried a provision therefor. […]

    1. For the reasons stated above, the present petition fails and therefore, the same is rejected.”

NCLAT too in Steel India v. Theme Developers (P) Ltd.,[10] upheld the latter approach and held that interest cannot be claimed if not agreed upon between the parties.

“[…] It is settled that the charging of interest, ought to be an actionable claim, enforceable under law, provided it was properly agreed upon between the parties.”

Thus, while there is still scope for a Supreme Court decision to settle the issue conclusively, the NCLAT decision does clarifies the position of law on this issue that “interest” is chargeable on an “operational debt” provided there is an agreement to that effect.

Whether “interest” would qualify as “operational debt” to file insolvency application under Section 9 of IBC.

While it is a good development that the interest on operational debt is being recognised and considered, there is also an unintended upshot of it as the creditors have started approaching NCLT seeking initiation of insolvency proceedings basis solely their claim towards interest even though the principal debt stands paid. This practice has, however, been deprecated regularly by both NCLT and NCLAT.

 

One of the earliest pronouncement on this issue was NCLAT decision in Krishna Enterprises v. Gammon India Ltd.[11] Here, the creditor filed a Section 9 Petition based merely upon “interest”. No principal amount was due. NCLAT Delhi although rightly dismissed the Section 9 petition but it was based on an incorrect reasoning that “interest” does not qualify as “debt” under IBC unless the interest is payable under the terms of the agreement. In other words, as per this decision, interest would qualify as “debt” if agreed between the parties.

 

  1. 5. […] the principle amount has already been paid and as per agreement no interest was payable, the applications under Section 9 on the basis of claims for entitlement of interest, were not maintainable. If for delayed payment appellant(s) claim any interest, it will be open to them to move before a court of competent jurisdiction, but initiation of Corporate Insolvency resolution process is not the answer.

Subsequently, however, NCLAT in S.S. Polymers v. Kanodia Technoplast Ltd.,[12] moved beyond the ruling in Gammon[13] and dismissed the Section 9 petition noting that it was being pursued only for realisation of interest amount in gross misuse of the IBC process as recovery mechanism. NCLAT held:

  1. Admittedly, before the admission of an application under Section 9 of the I&B Code, the “corporate debtor” paid the total debt. The application was pursued for realisation of the interest amount, which, according to us is against the principle of the I&B Code, as it should be treated to be an application pursued by the applicant with malicious intent (to realise only interest) for any purpose other than for the resolution of insolvency, or liquidation of the “corporate debtor” and which is barred in view of Section 65 of the I&B Code.

 

In a more recent decision, Amsons Communication (P) Ltd. v. ATS Estates (P) Ltd.[14], NCLAT Delhi reaffirmed this position and held that the provisions of IBC cannot be allowed as a recovery mechanism or to recover the claim of interest by operational creditor. It was held that Section 9 petition cannot be converted into proceedings for recovery of interest by operational creditor on delayed payment, as that is not the object of IBC.

Thus, it has been settled that “interest” in itself is not sufficient to maintain a Section 9 petition under IBC.

Whether “interest” can be clubbed with principal debt to cross-over the threshold limit of 1 crore

Post Notification dated 24-3-2020[15], the executive has revised the threshold for initiating insolvency proceedings under IBC to INR 1 crore from INR 1 lakh. Consequent thereto, courts[16] have held that if the insolvency application is filed after 24-3-2020, the increased threshold will apply. High Court of Kerala too, more recently, in Tharakan Web Innovations (P) Ltd. v. NCLT,[17] held that from the date of notification, IBC can apply only to matters relating to insolvency and liquidation of corporate debtors, where the minimum amount of default is INR 1 crore. Thus, no application can be filed after 24-3-2020 regarding an amount where the default is less than INR 1 crore.

 

This revision was intended to weed out applications filed for smaller defaults and to provide a breathing space to debtors during the COVID crisis. However, parties attempted to circumvent this by clubbing “interest” with “principal” debt to crossover the threshold limit.

 

Recently, in one such situation, NCLT Delhi in CBRE South Asia (P) Ltd. v. United Concepts and Solutions (P) Ltd.,[18] dismissed the Section 9 petition and held that interest amount cannot be clubbed with the principal amount to arrive at the minimum threshold of INR 1 crore. In this case, operational creditor had claimed a default of total amount of Rs. 1,39,84,400, out of which INR 88,50,886 was towards principal whereas the remaining INR 51,33,514 was towards interest. Since the principal outstanding was less than INR 1 crore, NCLT dismissed the petition as not maintainable. NCLT held:

“[…] it can be inferred that the ‘interest’ can be claimed as the financial debt, but neither there is any provision nor there is any scope to include the interest to constitute as the operational debt.”

 

While this reasoning is in line with the position of law as settled on related issues of “interest” viz. operational debt (as dealt above), it remains to be seen how different NCLTs and NCLATs look at this issue in the times to come. However, in order to prevent divergent views, it would be more apposite if these issues are settled through an authoritative judgment from NCLAT or Supreme Court and help avoid congestion before NCLT on account of filing of numerous otherwise non-maintainable Section  9 petitions.


†Partner, Cyril Amarchand Mangaldas.

†† Associate, Cyril Amarchand Mangaldas.

[1] See Delhi Cloth & General Mills Co. Ltd. v. Stepan Chemicals Ltd., 1984 SCC OnLine P&H 546 : (1986) 60 Comp Cas 1046; Krishna Chemicals v. Orient Paper and Industries Ltd., 2005 SCC OnLine Ori 159 : (2005) 128 Comp Cas 412.

[2] (2019) 4 SCC 17.

[3] (2019) 8 SCC 416.

[4] ‘Interest’ is not a sine qua non even for “financial debt” as held in Orator Marketing (P) Ltd. v. Samtex Desinz (P) Ltd., 2021 SCC OnLine SC 513.

[5] 2017 SCC OnLine NCLT 546. In this case, there were two bills of exchange and the debtor agreed to pay within 180 days. Since, the payments were not made, interest was sought to be levied by the creditor. This order was however later set-aside by NCLAT on different grounds.

[6] Wanbury Ltd. v. Panacea Biotech Ltd., 2017 SCC OnLine NCLT 475.

[7] Gulf Oil Lubricants India Ltd. v. Eastern Coalfields Ltd., 2019 SCC OnLine NCLT 7749. In this case, invoices carried a stipulation of interest on overdue payment and the debtor countersigned the same. This order was, however, later set aside by NCLAT in view of settlement between parties.

[8] 2017 SCC OnLine NCLT 475

[9] C.P. (IB) No. 1579/MB/C-IV/2019, order dated 28-4-2020.

[10] 2020 SCC Online NCLAT 200.

[11] 2018 SCC OnLine NCLAT 360.

[12] 2019 SCC OnLine NCLAT 1310.

[13] 2018 SCC OnLine NCLAT 360.

[14] 2021 SCC OnLine NCLAT 223.

[15] See MCA Notification dated 24-3-2020 increasing the threshold from INR 1 lakh to INR 1 crore.

[16] Jumbo Paper Products v. Hansraj Agrofresh (P) Ltd., Company Appeal(AT)(Ins) – 813 of 2021 (25-10-2021). Civil Appeal No. 7092 of 2021 is pending against the NCLAT Order. No Stay is ordered yet.

[17] 2020 SCC Online Ker 23744.

[18] CP (IB) No. 797/(ND)/2021.

National Consumer Disputes Redressal Commission
Case BriefsTribunals/Commissions/Regulatory Bodies

National Consumer Disputes Redressal Commission (NCDRC): The Coram of Dinesh Singh (Presiding Member) and Justice Karuna Nand Bajpayee (Member) expressed that in the ‘service’ of ‘housing construction’, if, in a particular case, “compensation” is computed “by way of interest” on the deposited amount it shall not be differently treated than the other cases in which the term “interest” may not at all be used in computing the compensation.

Background

This Commission had by an earlier order directed that OP shall refund the entire principal amount of Rs 2,74,79, 831,48 to the complainant alongwith compensation in form of simple interest at the rate of 11% and OP shall also pay a sum of Rs 25,000 as the cost of litigation.

Both sides admitted that the entire amount paid by the decree holder to the judgment debtors has been refunded along with the cost of litigation.

Issue for Consideration

Whether or not compensation which was computed by way of interest on the deposited amount, attracts TDS?

Analysis, Law and Decision

Coram stated that the only issue was in respect of deduction of tax at source on the “compensation” awarded, which in the present case was computed “in the form of simple interest” on the deposited amount.

Certainly, tax is not deducted at source if the compensation is awarded in the form of a lumpsum amount, or when the formula or yardstick, if and as any adopted for the purposes of computation, does not involve or refer to the term “interest”. It will therefore be erroneous to deduct tax at source just because in a particular case the formula or yardstick adopted for computation alludes to the term “interest”.

Commission clarified that it is neither adding to nor subtracting from the Income Tax Act. If a person is responsible to pay income tax on any revenue or capital receipt under the aid Act, he will be so liable.

Adding to the above, Coram stated that compensation awarded under the Consumer Protection Act is for the loss or injury suffered and is universally applicable to both goods and services inclusive of the service relating to housing construction.

The context and meaning of the term “interest” if used in the mode of calculation or a formula or yardstick adopted for computing compensation under section 2(1)(d) of the Consumer Protection Act is identifiably different from the context and meaning as used in Section 194A of the Income Tax Act.

Hence, there was no justification for deducting tax at source in the instant case.

Concluding the matter, the Commission observed that the tax deducted at source on compensation appeared to be a mistake with no malafide and even though the tax ought not to have been deducted it is also seen that the same has not been retained by the judgment debtors and deposited in the account of the decree-holder in the Income Tax Department.

In view of the above discussion, the matter was closed. [Rita Bakshi v. M3M India Ltd., 2022 SCC OnLine NCDRC 40, decided on 2-3-2022]


Advocates before the Commission:

For the Appellant: Mr. Deepak Narayana, Advocate

For the Respondent: Mr. A. K. Takkar, Advocate with Ms. Syashee Pesswani, Advocate

Case BriefsSupreme Court

Supreme Court: While deciding an almost three decade long commercial dispute relating to Arakonam Naval Air Station, the 3-Judge Bench comprising of N. V. Ramana, CJ, and A. S. Bopanna and Hima Kohli*, JJ., set aside the impugned judgment passed by the Division Bench of Madras High Court. The Bench remarked,

“By going into the minute details of the evidence led before the learned Sole Arbitrator with a magnifying glass and the findings returned thereon, the Appellate Court has clearly transgressed the limitations placed on it.”

The appellant claimant, a construction company had entered into a contract with the respondent-Union of India for construction of a runway and allied works at the Naval Air Station, Arakonam for a total contract price of ₹19,58,94,190 on 16-11-1988. The case of the appellant was that the respondent had arbitrarily rejected its request for extension of time and without any warning had terminated the contract on 02-04-1992 with immediate which was otherwise to expire on 31-03-1992.

Arbitration Award

On 24-06-1999 the sole arbitrator pronounced a detailed Award wherein a sum of Rs.25,96,87,442.89p was awarded in favour of the appellant-claimant, inclusive of interest up to 31-05-1999. Further, future interest was directed to be paid by the respondent-Union of India from 01-06-1999 at the rate of 18% per annum on the principal amount of Rs. 14,12,50,907.55p till realization. As regards the counter-claim of the respondent, the Sole Arbitrator awarded a sum of Rs.1,42,255 in its favour along with future interest.

Accepting as many as twenty reasons cited by the counsel for the appellant-claimant that had caused a delay in completing the work that necessitated extension of time, ranging from water logged conditions at the site due to which, the work could not commence till 31-12-1988, increase in the quantity of the work required to be executed, orders issued by the respondent for procuring and deploying of sophisticated machinery and equipment that were not originally contemplated, non-availability of petroleum products due to the Gulf crisis, stoppage of work for inauguration of the runway, non-issue of entry passes to labourers and removal of operators and staff of the operators, etc., the arbitrator  held that the appellant-claimant could not be blamed for non-completion of the work within the stipulated time, including the extended time and that the respondent ought to have extended the date of completion of the contract up to 31-05-1993 and that the extension of time granted by the respondent up to 31-03-1992, was inadequate and not commensurate with the delays caused for the factors referred to hereinabove.

Findings of the High Court

The Division Bench of the High Court had, however, set aside the amount awarded by the Sole Arbitrator in favour of the appellant towards idle hire charges and value of the tools and machineries. Similarly, the findings returned in the Award relating to extension of time and illegal termination of the contract by the respondent were also set aside.

Observations and Analysis

Though the appellant-claimant had sought compensation under several heads, the Sole Arbitrator granted it an amount of ₹15,35,40,785 towards idle hire charges and for the value of the machinery, inclusive of interest upto 31st May, 1999 for arriving at that figure, reliance was placed by the arbitrator on the report of an Engineer appointed by the Division Bench of the High Court of Madras in a separate proceeding filed by the appellant-claimant to ascertain the availability of the different items and machineries and their value.

The Appellate Court had set aside the aforesaid claim by taking a view that the Sole Arbitrator had misconducted himself by observing that the claimant “may be correct” in not taking the machineries without an inventory when they were available at the site in spite of the High Court order granting permission to the appellant-claimant to remove the equipment and machineries from the site. The High Court held that the Sole Arbitrator had interpreted the clauses of the contract by taking a particular view and had gone to great length to analyse several reasons offered by the appellant-claimant to justify its plea that it was entitled for extension of time to execute the contract.

Disapproving the view taken by the High Court, the Bench stated that the Division Bench ought not to have sat over the said decision as an Appellate Court and seek to substitute its view for that of the Arbitrator.  Resultantly, accepting the findings returned by the Sole Arbitrator endorsed by the Single Judge, the Bench held that there was sufficient justification for the appellant-claimant to have sought extension of time for completing the work and that the decision of the respondent-Union of India to terminate the contract was not for legitimate reasons.

Verdict

In the backdrop of above, the Bench concluded that the conclusion drawn by the Appellate Court was manifestly erroneous and in the face of the settled legal position that the Arbitrator is the final arbiter of the disputes between the parties and it is not open to a party to challenge the Award on the ground that he has drawn his own conclusions or has failed to appreciate certain facts. The impugned judgment was set aside, while the judgment of the Single Judge and decree granted in favour of the appellant-claimant in terms of the Award along with interest was upheld and restored.

[Atlanta Ltd. v. Union of India, 2022 SCC OnLine SC 49, decided on 18-01-2022]


*Judgment by: Justice Hima Kohli


Appearance by:

For the Appellant/Claimant: Meenakshi Arora, Senior Advocate

For the Union of India: Sanjay Jain, Additional Solicitor General


Kamini Sharma, Editorial Assistant has put this report together

Case BriefsSupreme Court

Supreme Court: The 3-judge Bench comprising of N.V. Ramana, CJ., A.S. Bopanna and Hima Kohli*, JJ., held that Arbitral Tribunal is empowered to award interest on post award interest.

The instant appeal was filed by UHL Power Co. Ltd. against the order of the Himachal Pradesh High Court disallowing it pre-claim interest i.e., interest from the date when expenses were incurred, till the date of lodging the claim.

Background

Noticeably, the Sole Arbitrator had awarded a sum of Rs. 26,08,89,107.35p. in favour of UHL towards expenses claimed along with pre-claim interest capitalized annually, on the expenses so incurred. Further, compound interest was awarded at 9% per annum till the date of claim and in the event the awarded amount is not realized within a period of six months, future interest was awarded at 18% per annum on the principal claim with interest.  However, in appeal under Section 34 of the Arbitration Act, 1996 the Single Judge had disallowed the entire claim of UHL.

The said judgment was challenged by UHL under Section 37 of the Arbitration Act and the Division Bench of the High Court had awarded a sum of Rs. 9,10,26,558.74 in favour of UHL, being the actual principal amount along with simple interest at 6% per annum from the date of filing of the claim, till the date of realization of the awarded amount.

Can interest be awarded on post-award interest?

For declining payment of compound interest awarded by the Sole Arbitrator to UHL, the Division Bench relied on the decision in State of Haryana v. S.L. Arora & Co., (2010) 3 SCC 690, to hold that in the absence of any provision for interest upon interest in the contract, the Arbitral Tribunals do not have the power to award interest upon interest, or compound interest, either for the pre-award period or for the post-award period.

Since the decision of S.L. Arora’s case had been overruled in Hyder Consulting (UK) Ltd. v. State of Orissa, (2015) 2 SCC 189, now, post-award interest can be granted by an Arbitrator on the interest amount awarded. Therefore, the Bench held that the findings returned in the impugned judgment to the effect that the Arbitral Tribunal is not empowered to grant compound interest or interest upon interest and only simple interest can be awarded in favour of UHL on the principal amount claimed, was quashed and set aside. Consequently, the findings of the Division Bench insofar as it related to grant of the interest component, were reversed and the arbitral award was restore on the above aspect in favour of UHL.

Whether Memorandum of Undertaking and Implementation Agreement were Separate Documents?

Rejecting the argument of the State that the Memorandum of Undertaking (MoU) did not merge into the Implementation Agreement, as both were distinct documents and that the MoU contained a separate Arbitration clause numbered as Clause 18, whereas the Implementation Agreement contained Clause 20, the Bench opined that a perusal of the recitals and the clauses contained in the Implementation Agreement belied such a submission, specifically, that the said MoU had been mentioned as “Appendix A” in the second recital of the Implementation Agreement.

Further, the same could be reinforced on a reading of the definition of the word “Agreement” as used in Clause 2.2 of the Implementation Agreement which clearly states that the word “Agreement” wherever used in the Implementation Agreement, shall include all its appendices and annexures and the MoU having been described by the parties as Appendix A to the Implementation Agreement, would have to be treated as having merged with the Implementation Agreement for all effects and purposes. Consequently, the Bench affirmed the findings of the Division Bench that the MoU had merged with the Implementation Agreement and, therefore,

“…the disputes that were referable to arbitration under the Implementation Agreement were to include disputes arising under the MoU, even though the latter document did contain a separate arbitration clause.”

Analysis and Conclusion

Rejecting the argument of the State that the Implementation Agreement had to be executed within a period of one year and since the provision for extension beyond one year was applicable only to the conditions contemplated in Clause 4.1(a) and (b) and not to those stipulated in Clause 4.1(c) to (g), the Bench said,

“When the parties to the Implementation Agreement were ad idem that the period of one year available to UHL to commence the construction activity was to be reckoned after the major requirements prescribed in Clause 4.1 could be obtained, then any argument sought to be advanced to segregate the obligations under different sub-heads of Clause 4.1 only to lay the blame at the door of UHL when the requisite clearances were to be obtained by the State Government from the Central Government and Centralized Authorities, is devoid of merits, besides being completely unreasonable and illogical.”

Upholding the view of the Division Bench that the Single Judge committed a gross error in re-appreciating the findings returned by the Arbitral Tribunal and taking an entirely different view as it was not open to the said Court to do so in proceedings under Section 34 of the Arbitration Act, by virtually acting as a Court of Appeal.

Consequently, the Bench restored the findings returned in the arbitral award to the effect that the State of Himachal Pradesh had proceeded to terminate the Implementation Agreement before expiry of the prescribed period which could have been extended up to 24 months, reckoned from the “effective date”, i.e. five months prior to the stipulated period by adopting a distorted interpretation of Clause 4 of the Implementation Agreement, which was impermissible.

In view of the above, the appeal preferred by UHL was partly allowed, while appeal filed by the State of Himachal Pradesh was rejected in toto.

[UHL Power Co. Ltd. v. State of Himachal Pradesh, 2022 SCC OnLine SC 19, decided on 07-01-2022]


*Judgment by: Justice Hima Kohli


Kamini Sharma, Editorial Assistant has put this report together 

 

Case BriefsSupreme Court

Supreme Court: The Division Bench comprising of M.R. Shah* and B.V. Nagarathna, JJ., held that where it is specifically barred in the contract, the Arbitrator cannot award any interest pendente lite or future interest on the amounts due and payable to the contractor under the contract. Rejecting the claim of the respondent that the government having claimed interest itself could not oppose the same, the Bench stated,

“Even if the government would have been awarded interest, the same also was not permissible and could have been a subject matter of challenge. In short, there cannot be an estoppel against law.”

Factual Matrix

A dispute had arisen between the parties with regard to three work contracts and both the parties went into arbitration for the resolution of the dispute. The sole arbitrator awarded an amount of Rs.78,81,553.08  along with pendente lite and future interest at the rate of 12% and 18% respectively on the entire awarded amount except for the earnest money deposit and security deposit. That the Union of India preferred an appeal challenging the award pertaining to pre-suit, pendente lite and future interest awarded on the balance due payment. The High Court dismissed the appeal and confirmed the award. By being aggrieved and dissatisfied with the impugned judgment of the Delhi High Court, the Union of India had preferred the present appeal.

The Union Government argued that as agreed between the parties and as per clause 16(2) of the General Conditions of Contract (GCC), there was a bar against payment of interest and no interest should be payable upon the earnest money or the security deposit or the amounts payable to the contractor under the contract. The government further argued that if there is an expression “agreed between the parties” governing the contract that no interest shall be payable, parties are bound by such an agreement and no interest either pendente lite or future interest on the amount due and payable under the contract shall be awarded.

Bar on the Arbitrator to award interest pendent lite

Rejecting the contention of the respondent that the bar was on the parties from claiming interest on security deposits and earnest money and not on the arbitrator from awarding it, the Bench observed, once the contractor agrees that he shall not be entitled to interest on the amounts payable under the contract, including the interest upon the earnest money and the security deposit as mentioned in clause 16(2) of the agreement/contract between the parties herein, the arbitrator in the arbitration proceedings being the creature of the contract has no power to award interest, contrary to the terms of the agreement/contract between the parties and contrary to clause 16(2) of the agreement/contract in question in this case.

Reliance was placed by the Court on Union of India v. Bright Power Projects (India) (P) Ltd., (2015) 9 SCC 695, wherein it was held that Section 31(7) of the 1996 Act, by using the words “unless otherwise agreed by the parties” categorically specifies that the arbitrator is bound by the terms of the contract insofar as award of interest from the date of cause of action to date of the award is concerned. It was further observed and held that where the parties had agreed that no interest shall be payable, the Arbitral Tribunal cannot award interest.

Therefore, the Bench held that the contention raised by the respondent that de hors the bar under clause 16(2), the Arbitral Tribunal independently and on equitable ground and/or to do justice can award interest pendente lite or future interest had no substance and could not be accepted. The Bench stated, once the contractor agrees that he shall not be entitled to interest on the amounts payable under the contract, including the interest upon the earnest money and the security deposit as mentioned in clause 16(2) of the agreement/contract between the parties, the arbitrator in the arbitration proceedings being the creature of the contract has no power to award interest, contrary to the terms of the agreement/contract between the parties and contrary to clause 16(2) of the agreement/contract.

Applicability of ejusdem generis

Regarding the contention of the respondent that the entire clause 16 of GCC specifically deals with to earnest money and security deposits and the same could in no way be read in a manner to imply a bar on pendente lite interest or other amounts as contended on behalf of the government, the Bench stated that it was required to be noted that clause 16(1) was with respect to earnest money/security deposit. However, clause 16(2) was specifically with respect to interest payable upon the earnest money or the security deposit or amounts payable to the contractor under the contract. Similarly,

The words used in clause 16(2) is “or”. Therefore, the expression “amounts payable to the contractor under the contract” cannot be read in conjunction with “earnest money deposit” or “security deposit” by applying the principle of ejusdem generis.

Hence, the expression “amounts payable to the contractor under the contract” had to be read independently and disjunctively to earnest money deposit and security deposit as the word used was “or” and not “and” between “earnest money deposit”, “security deposit” and “amounts payable to the contractor under the contract”. Therefore, the principle of ejusdem generis was not applicable in the instant case.

Estoppel

The respondent had argued that the issue raised was covered by the judgment in Union of India v. Pradeep Vinod Construction Co., Civil Appeal No. 2099 of 2017, and therefore once it had been conceded, it was not open for the government to raise the same issue after having made a clear concession, and that the government  too had claimed interest at the rate of 18% from the respondent by way of counter-claim, hence it could not be permitted to say that no interest pendente lite was liable to be awarded by the arbitrator. The Bench opined that it was required to be noted that the concession if any which is contrary to the law laid down by this Court shall not be binding on the parties. Further, the Bench held that merely because the appellant had claimed interest, it did not imply that the contractor shall be entitled to interest pendente lite.

Verdict

Hence, the Bench held that the Arbitrator had erred in awarding pendente lite and future interest on the amount due and payable to the contractor under the contract in question and the same had been erroneously confirmed by the High Court. Accordingly, due and payable to the contractor under the contract were quashed and set aside. [Union of India v. Manraj Enterprises, 2021 SCC OnLine SC 1081, decided on 18-11-2021]


Kamini Sharma, Editorial Assistant has put this report together 


Appearance by:

For the Union of India: K.M. Nataraj, Additional Solicitor General

For the Respondent: Vikas Singh, Senior Advocate


*Judgment by: Justice M. R. Shah

Know Thy Judge | Justice M. R. Shah

 

 

 

 

 

 

 

 

 

 

 

 

Case BriefsHigh Courts

Madhya Pradesh High Court: Subodh Abhyankar, J., partly allowed a petition which was filed aggrieved whereby respondent 3 had initiated the recovery of the amount paid in excess.

The petitioner being a non-ministerial employee was given the benefit of increment and the Supreme Court had upheld that amount was wrongly paid to the non-ministerial staff after which State Government had initiated the recovery against all the employees who had been given the said benefit.

Counsel for the petitioner submitted that the petitioner was not challenging the recovery of the principal amount, but he was aggrieved by the recovery of interest as there was no fault on the part of the petitioner to get the increment.

The Court agreed that the Petitioner being the ministerial staff of the police department was not entitled to get the said ad-hoc increment, but the same was given to him along with others by the department itself, hence, recovery of the interest was not justified.

The Court allowed the petition to the extent that recovery of the principal was justified but the recovery of the interest wasn’t thus the part of the order was quashed and further directed that any amount already recovered as interest be returned to the petitioner.[Radheshyam Yadav v. State of M.P., 2021 SCC OnLine MP 2032, decided on 27-10-2021]


Suchita Shukla, Editorial Assistant has reported this brief.


Counsel for the petitioner: Shri L. C. Patne

Counsel for the respondents/State: Shri Aditya Garg

Uttarakhand High Court
Case BriefsHigh Courts

Uttaranchal High Court: The Division Bench of Raghvendra Singh Chauhan, CJ. and Alok Kumar Verma, J., dismissed an appeal which was filed with the issue as to whether the petitioners were entitled to receive the minimum of the pay-scale, and the Dearness Allowance admissible to the regularly appointed employees, or not?

Counsel for both the parties submitted that issue involved in the present Appeal is already covered by the case of Uttaranchal Van Shramik Sangh Ranibagh Etc. v. State of Uttarakhand, SLP (C) Nos. 11651-11652 of 2019, decided by the Supreme Court by its judgment dated 12-02-2020 where the issue was whether the contractual workers were entitled to receive the Dearness Allowance or not? The Court had observed that “suffice for us to say that if dearness allowance is being given to other daily wagers, naturally the State will not discriminate the daily-wagers on this aspect.”

Single Judge earlier had directed the respondent-State “to pay and release the Dearness Allowance to the petitioners at par with the members of Kumaun Ban Shramik Sangh, Center at Ranikhet with effect from 21.03.2002 within a period of ten weeks from the date of the order with arrears”. He further directed that “the petitioners shall be entitled to interest @ Rs. 12% per annum and if the amount is not released to the petitioners, the petitioners shall be entitled to 18% interest per annum till the payment is made to them”.

The Court dismissing the appeal held that once a concession was made by the State before the Hon’ble Supreme Court, the State is equally bound by the said concession.

[State of Uttarakhand v. Bahadur Singh Rawat, 2021 SCC OnLine Utt 1174, decided on 21-10-2021]


Suchita Shukla, Editorial Assistant has reported this brief.

Case BriefsSupreme Court

Supreme Court: The bench of SA Nazeer* and Krishna Murari, JJ has held that if the contract contains a specific clause which expressly bars payment of interest, then it is not open for the arbitrator to grant pendente lite interest.

Facts

Parties entered into a contract for construction of boundary wall at 2×750 MW Pragati III Combined Cycle Power at Bawana, Delhi, which, inter alia, contained the interest barring the following clause:

“Clause 17: No interest shall be payable by BHEL on Earnest Money Deposit, Security Deposit or on any moneys due to the contractor.”

When the dispute arose between the parties, the appellant, apart from claiming various amounts under different heads, inter alia claimed pre-reference, pendente lite and future interest at the rate of 24% on the value of the award.

The Arbitrator concluded that there is no prohibition in the contract about payment of interest for the pre-suit, pendente lite and future period.  Therefore, he awarded pendente lite and future interest at the rate of 10% p.a. to the appellant on the award amount from the date of filing of the claim petition i.e. 02.12.2011 till the date of realization of the award amount.

Analysis

Interest payments are governed in general by the Interest Act, 1978 in addition to the specific statutes that govern an impugned matter.

  • Section 2 (a) of the Interest Act defines a “Court” which includes both a Tribunal and an Arbitrator.
  • Section 3 allows a “Court” to grant interest at prevailing interest rates in various cases. The provisions of Section 3 (3) of the Interest Act, 1978 explicitly allows the parties to waive their claim to an interest by virtue of an agreement. Section 3(3)(a)(ii) states that the Interest Act will not apply to situations where the payment of interest is “barred by virtue of an express agreement”.

Further, the provisions of the Arbitration and Conciliation Act, 1996 give paramount importance to the contract entered into between the parties and categorically restricts the power of an arbitrator to award pre-reference and pendente  lite  interest when the parties themselves have agreed to the contrary.

Section 31(7)(a) of the 1996 Act which deals with the payment of interest is as under :

“31(7)(a) Unless otherwise agreed by the parties, where and insofar as an arbitral award is for the payment of money, the arbitral tribunal may include in the sum for which the award is made interest, at such rate as it deems reasonable, on the whole or any part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made.”

The provision makes it clear that if the contract prohibits pre-reference and pendente lite interest, the arbitrator cannot award interest for the said period.

In the present case, clause barring interest is very clear and categorical. It uses the expression “any moneys due to the contractor” by the employer which includes the amount awarded by the arbitrator.

Hence, it was held that when there is an express statutory permission for the parties to contract out of receiving interest and they have done so without any vitiation of free consent, it is not open for the Arbitrator to grant pendent lite interest.

Important rulings

Sayeed Ahmed and Company v. State of Uttar Pradesh, (2009) 12 SCC 26

A provision has been made under Section 31(7)(a) of the 1996 Act in relation to the power of the arbitrator to award interest.  As per this section, if the contract bars payment of interest, the arbitrator cannot award interest from the date of cause of action till the date of award.

Sree Kamatchi Amman Constructions v. Divisional Railway Manager (Works), (2010) 8 SCC 767

here the parties had agreed that the interest shall not be payable, the Arbitral Tribunal cannot award interest between the date on which the cause of action arose to the date of the award.

Sri Chittaranjan Maity v. Union of India, (2017) 9 SCC 611

If a contract prohibits award of interest for pre-award period, the arbitrator cannot award interest for the said period.

[Garg Builders v. Bharat Heavy Electricals Ltd., 2021 SCC OnLine SC 855, decided on 04.10.2021]

_______________________________________________

Counsels:

For appellant: Advocate Sanjay Bansal

For respondent: Advocate Pallav Kumar


*Judgment by: Justice SA Nazeer

Know Thy Judge | Justice S. Abdul Nazeer

CBDT
Legislation UpdatesNotifications

On September 17, 2021, the Central Board of Direct Taxes (CBDT)  has issued a notification  that no deduction of tax shall be made on the following payment under section 194A of the Income-tax Act, 1961, which specifies, Interest other than “interest on securities”, made by a scheduled bank located in a specified area, to a member of Scheduled Tribe residing in any specified area, as referred to in clause (26) of section 10 of the Income-tax Act, 1961 subject to the following conditions:

 

  • The payer satisfies itself that the receiver is a member of Scheduled Tribe residing in any specified area, and the payment as referred above is accruing or arising to the receiver as referred to in clause (26) of section 10 of the said Act, during the previous year relevant for the assessment year in which the payment is made, by obtaining necessary documentary evidences in support of the same;
  • The payer reports the above payment in the statements of deduction of tax as referred to in sub- section (3) of section 200 of the said Act;
  • The payment made or aggregate of payments made during the previous year does not exceed twenty lakh rupees.
Case BriefsSupreme Court

Supreme Court: The division bench of RF Nariman* and BR Gavai, JJ has explained the object and scope of Explanation 3C of the Section 43B of the Income Tax Act, 1961 and has held that Explanation 3C is clarificatory as it explains Section 43B(d) as it originally stood and does not purport to add a new condition retrospectively.

Section 43B. Certain deductions to be only on actual payment – Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

xxx xxx xxx

(d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State financial corporation or a State industrial investment corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing, or

xxx xxx xxx

shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him: Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.

xxx xxx xxx

Explanation 3C.—For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (d) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or borrowing shall not be deemed to have been actually paid.

Why was Section 43B inserted?

Section 43B was originally inserted by the Finance Act, 1983 w.e.f. 1st April, 1984 after taking note of the fact that in several cases taxpayers were not discharging their statutory liability such as in respect of excise duty, employer’s contribution to provident fund, Employees State Insurance Scheme, etc., for long periods of time, extending sometimes to several years.

To curb this practice, the Finance Act inserted a new section 43B to provide that deduction for any sum payable by the assessee by way of tax or duty under any law for the time being in force or any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees shall irrespective of the previous year in which the liability to pay such sum was incurred, be allowed only in computing the income of that previous year in which such sum is actually paid by the assessee.

Why was Explanation 3C inserted?

The Finance Act, 2006 inserted Explanation 3C w.e.f. 1st April, 1989 after it was brought to the Board’s notice that certain assessees were claiming deduction under section 43B on account of conversion of interest payable on an existing loan into a fresh loan on the ground that such conversion was a constructive discharge of interest liability and, therefore, amounted to actual payment. Claim of deduction against conversion of interest into a fresh loan is a case of misuse of the provisions of section 43B.

A new Explanation 3C was, therefore, inserted to clarify that if any sum payable by the assessee as interest on any loan or borrowing, referred to in clause (d) of section 43B, is converted into a loan or borrowing, the interest so converted, shall not be deemed to be actual payment.

Object of Section 43B and Explanation 3C

The object of Section 43B, as originally enacted, is to allow certain deductions only on actual payment. This is made clear by the nonobstante clause contained in the beginning of the provision, coupled with the deduction being allowed irrespective of the previous years in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by it.

“In short, a mercantile system of accounting cannot be looked at when a deduction is claimed under this Section, making it clear that incurring of liability cannot allow for a deduction, but only “actual payment”, as contrasted with incurring of a liability, can allow for a deduction.”

Explanation 3C, which was introduced for the “removal of doubts”, only made it clear that interest that remained unpaid and has been converted into a loan or borrowing shall not be deemed to have been actually paid.

“… at the heart of the introduction of Explanation 3C is misuse of the provisions of Section 43B by not actually paying interest, but converting such interest into a fresh loan.”

Hence,

  • Since Explanation 3C was added in 2006 with the object of plugging a loophole – i.e. misusing Section 43B by not actually paying interest but converting interest into a fresh loan, bona fide transactions of actual payments are not meant to be affected.
  • A retrospective provision in a tax act which is “for the removal of doubts” cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood.
  • Any ambiguity in the language of Explanation 3C shall be resolved in favour of the assessee as per Cape Brandy Syndicate v. Inland Revenue Commissioner [1921 (1) KB 64] as followed in Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613.

[MM Aqua Technologies Ltd. v. Commissioner of Income Tax, 2021 SCC OnLine SC 575, decided on 11.08.2021]


*Judgment by: Justice RF Nariman

Experts CornerTarun Jain (Tax Practitioner)

  1. Introduction

Determination of proceedings for recovery of tax takes its own time, passing through the adjudication stage, appellate stages and ultimately judicial review of tax administration’s actions. It is vividly possible that, in the interim the taxpayer may engage in activities which frustrate the tax administration’s recovery proceedings. For illustration, the taxpayer may liquidate the business partly or in whole, dispose significant assets, etc. in order to avoid recovery. In order to address such challenges, the tax administration is entrusted with statutory powers to pre-empt such attempts of the taxpayers to forestall recovery. For illustration, Section 281 of the Income Tax Act, 1961 cloths the tax administration with the power to declare “certain transfers to be void”.[1] In the goods and services tax (GST) laws, the tax administration is entrusted with the power to effect “provisional attachment to protect revenue in certain cases” wherein “any property, including bank account” can be attached provisionally by the tax administration during the pendency of certain proceedings.

 

In a short span of four years since the enforcement of GST laws, this power of provisional attachment has been exercised in plenitude by the tax administration which has resulted into judicial challenges and detailed judgments of the High Court. Recently the Supreme Court was seized with a controversy regarding provisional attachment of the properties of a taxpayer by the Himachal Pradesh GST authorities. By way of a detailed judgment in Radha Krishan Industries v. State of H.P.[2], the Supreme Court has culled out the relevant facets of this power of GST authorities, its contours, limitations, etc. as also enunciated the role of the courts in monitoring the exercise of this power by the GST authorities. The decision is expected to streamline the exercise of such powers under the GST laws while also balancing the rights of the taxpayers. This case comment explores the decision in greater detail so as to demystify the legal position and envision its impact on GST laws.

 

  1. Factual Setting before the Supreme Court

The appellant before the Supreme Court was a manufacturer who was issued a notice under Section 78 of the Himachal Pradesh Goods and Services Tax Act, 2017 (H.P. GST). Post a series of hearings, the Joint Commissioner of State Taxes passed orders provisionally attaching the appellant’s receivables from its customers. The provisional attachment was ordered under Section 83 of the H.P. GST read with Rule 159 framed thereunder. This provisional attachment was challenged by the appellant by way of writ petition before the High Court. Instead of adverting to the merits of the challenge, however, the High Court dismissed the writ petition on the ground of maintainability, citing availability of alternate remedies. This refusal by the High Court to examine the correctness of the provisional attachment order was challenged before the Supreme Court.

 

  1. Enunciating the Contours and Limitations on the Power of Provisional Attachment

The relevant provision of the Central Goods and Services Tax Act, 2017 (which has been similarly incorporated under the State GST laws, such as the H.P. GST) states as under:

 

  1. Provisional attachment to protect revenue in certain cases.— (1) Where, after the initiation of any proceeding under Chapter XII, Chapter XIV or Chapter XV, the Commissioner is of the opinion that for the purpose of protecting the interest of the government revenue it is necessary so to do, he may, by order in writing, attach provisionally, any property, including bank account, belonging to the taxable person or any person specified in sub-section (1-A) of Section 122, in such manner as may be prescribed.

(2) Every such provisional attachment shall cease to have effect after the expiry of a period of one year from the date of the order made under sub-section (1).

 

The Supreme Court extensively dissected the statutory scheme under the GST laws whereupon the power of provisional attachment was pedestaled. Noting that in the aforesaid scheme the power was no unbridled and instead was circumscribed by various conditions inherent in the statutory scheme, the Supreme Court laid out the following six parts in which sub-section (1) of Section 83 could be divided, observing thus:

 

  1. 42. Sub-section (1) of Section 83 can be bifurcated into several parts. The first part provides an insight on when in point of time or at which stage the power can be exercised. The second part specifies the authority to whom the power to order a provisional attachment is entrusted. The third part defines the conditions which must be fulfilled to validate the power or ordering a provisional attachment. The fourth part indicates the manner in which an attachment is to be levelled. The final and the fifth part defines the nature of the property which can be attached. Each of these special divisions which have been explained above is for convenience of exposition. While they are not watertight compartments, ultimately and together they aid in validating an understanding of the statute. Each of the above five parts is now interpreted and explained below:

(i) The power to order a provisional attachment is entrusted during the pendency of proceedings under any one of six specified provisions: Sections 62, 63, 64, 67, 73 or Section 74. In other words, it is when a proceeding under any of these provisions is pending that a provisional attachment can be ordered.

(ii) The power to order a provisional attachment has been vested by the legislature in the Commissioner.

(iii) Before exercising the power, the Commissioner must be “of the opinion that for the purpose of protecting the interest of the government revenue, it is necessary so to do”.

(iv) The order for attachment must be in writing.

(v) The provisional attachment which is contemplated is of any property including a bank account belonging to the taxable person.

(vi) The manner in which a provisional attachment is levied must be specified in the rules made pursuant to the provisions of the statute.

 

Explaining the practical purport of this scheme, the Supreme Court opined that formation of “opinion” was sine qua non for exercise of this power and thus is its precondition. Enthralling the salient features of this conditionality, the Supreme Court observed the following:

 

  1. 49. Now in this backdrop, it becomes necessary to emphasise that before the Commissioner can levy a provisional attachment, there must be a formation of “the opinion” and that it is necessary “so to do” for the purpose of protecting the interest of the government revenue. The power to levy a provisional attachment is draconian in nature. By the exercise of the power, a property belonging to the taxable person may be attached, including a bank account. The attachment is provisional and the statute has contemplated an attachment during the pendency of the proceedings under the stipulated statutory provisions noticed earlier. An attachment which is contemplated in Section 83 is, in other words, at a stage which is anterior to the finalisation of an assessment or the raising of a demand. Conscious as the legislature was of the draconian nature of the power and the serious consequences which emanate from the attachment of any property including a bank account of the taxable person, it conditioned the exercise of the power by employing specific statutory language which conditions the exercise of the power. The language of the statute indicates first, the necessity of the formation of opinion by the Commissioner; second, the formation of opinion before ordering a provisional attachment; third the existence of opinion that it is necessary so to do for the purpose of protecting the interest of the government revenue; fourth, the issuance of an order in writing for the attachment of any property of the taxable person; and fifth, the observance by the Commissioner of the provisions contained in the rules in regard to the manner of attachment. Each of these components of the statute are integral to a valid exercise of power. In other words, when the exercise of the power is challenged, the validity of its exercise will depend on a strict and punctilious observance of the statutory preconditions by the Commissioner. While conditioning the exercise of the power on the formation of an opinion by the Commissioner that “for the purpose of protecting the interest of the government revenue, it is necessary so to do”, it is evident that the statute has not left the formation of opinion to an unguided subjective discretion of the Commissioner. The formation of the opinion must bear a proximate and live nexus to the purpose of protecting the interest of the government revenue.
  2. 50. By utilising the expression “it is necessary so to do” the legislature has evinced an intent that an attachment is authorised not merely because it is expedient to do so (or profitable or practicable for the revenue to do so) but because it is necessary to do so in order to protect interest of the government revenue. Necessity postulates that the interest of the revenue can be protected only by a provisional attachment without which the interest of the revenue would stand defeated. Necessity in other words postulates a more stringent requirement than a mere expediency. A provisional attachment under Section 83 is contemplated during the pendency of certain proceedings, meaning thereby that a final demand or liability is yet to be crystallised. An anticipatory attachment of this nature must strictly conform to the requirements, both substantive and procedural, embodied in the statute and the rules. The exercise of unguided discretion cannot be permissible because it will leave citizens and their legitimate business activities to the peril of arbitrary power. Each of these ingredients must be strictly applied before a provisional attachment on the property of an assesses can be levied. The Commissioner must be alive to the fact that such provisions are not intended to authorise Commissioners to make pre-emptive strikes on the property of the assessee, merely because property is available for being attached. There must be a valid formation of the opinion that a provisional attachment is necessary for the purpose of protecting the interest of the government revenue.
  3. 51. These expressions in regard to both the purpose and necessity of provisional attachment implicate the doctrine of proportionality. Proportionality mandates the existence of a proximate or live link between the need for the attachment and the purpose which it is intended to secure. It also postulates the maintenance of a proportion between the nature and extent of the attachment and the purpose which is sought to be served by ordering it. Moreover, the words embodied in sub-section (1) of Section 83, as interpreted above, would leave no manner of doubt that while ordering a provisional attachment the Commissioner must in the formation of the opinion act on the basis of tangible material on the basis of which the formation of opinion is based in regard to the existence of the statutory requirement.

 

The aforesaid aspect reveals that the Supreme Court has effectively rewritten the scheme regarding the power of the tax administration of provisional attachment whereby (a) heavy onus has been placed upon the tax administration to demonstrate the necessity for the exercise of such power objectively and judicially; and (b) also ensure its limited application, in view of the doctrine of proportionality.

 

In order to incorporate further safeguards towards protecting the taxpayers against indiscriminate exercise of this power, the Supreme Court culled out the principles prevailing under the income tax laws, namely, the “tangible material” test as the basis for inquiry and exercise of powers. On this point, the Supreme Court observed as under:

  1. 52. We adopt the test of the existence of “tangible material”. In this context, reference may be made to the decision of this Court in CIT Kelvinator of India Ltd.[3] Mr Justice S.H. Kapadia (as the learned Chief Justice then was) while considering the expression “reason to believe” in Section 147 of the Income Tax Act, 1961 that income chargeable to tax has escaped assessment inter alia by the omission or failure of the assessee to disclose fully and truly all material facts necessary for the assessment of that year, held that the power to reopen an assessment must be conditioned on the existence of “tangible material” and that “reasons must have a live link with the formation of the belief”. This principle was followed subsequently in a two-Judge Bench decision in ITO v. Techspan India (P) Ltd.[4] While adverting to these decisions we have noticed that Section 83 of the H.P. GST Act uses the expression “opinion” as distinguished from “reasons to believe”. However for the reasons that we have indicated earlier we are clearly of the view that the formation of the opinion must be based on tangible material which indicates a live link to the necessity to order a provisional attachment to protect the interest of the government revenue.

 

To conclude on the legal position, the Supreme Court decision summarises as under:

  1. 79. …

(iv) The power to order a provisional attachment of the property of the taxable person including a bank account is draconian in nature and the conditions which are prescribed by the statute for a valid exercise of the power must be strictly fulfilled.

(v) The exercise of the power for ordering a provisional attachment must be preceded by the formation of an opinion by the Commissioner that it is necessary so to do for the purpose of protecting the interest of the government revenue. Before ordering a provisional attachment the Commissioner must form an opinion on the basis of tangible material that the assessee is likely to defeat the demand, if any, and that therefore, it is necessary so to do for the purpose of protecting the interest of the government revenue.

(vi) The expression “necessary so to do for protecting the government revenue” implicates that the interests of the government revenue cannot be protected without ordering a provisional attachment.

(vii) The formation of an opinion by the Commissioner under Section 83(1) must be based on tangible material bearing on the necessity of ordering a provisional attachment for the purpose of protecting the interest of the government revenue.

***

(ix) Under the provisions of Rule 159(5), the person whose property is attached is entitled to dual procedural safeguards:

(a) An entitlement to submit objections on the ground that the property was or is not liable to attachment; and

(b) An opportunity of being heard.

(x) The Commissioner is duty-bound to deal with the objections to the attachment by passing a reasoned order which must be communicated to the taxable person whose property is attached.

 

On the facts of the decision, the Supreme Court rejected the tax administration’s reasoning and declared the provisional attachment to be unlawful.

 

  1. Reflections on Role of High Courts in Provisional Attachment Cases

According to the Supreme Court, the Himachal Pradesh High Court[5] erred in refusing to examine on merits the correctness of provisional attachment by dismissing the writ petition as non-maintainable. In the process of addressing the correctness of the High Court decision, the Supreme Court opined that the power of provisional attachment made significant inroads into the property rights of the taxpayers and thus close supervision of the exercise of such powers was necessary. Being of the opinion that under the statutory scheme of GST there was no means to correct errors in the exercise of such powers by the statutory authorities, the Supreme Court declared that it was incumbent upon the High Courts to exercise their extraordinary writ jurisdiction to examine the propriety of the tax administration’s exercise of power of provisional attachment. For such reason, the Supreme Court categorically concluded as maintainable a writ petition challenging an order of provisional attachment. In doing so, the Supreme Court also affirmed the views of various High Courts which had exercise addressed this proposition.[6] Some of the key propositions emanating from the High Court decisions, which were approved by the Supreme Court in Radha Krishan Industries v. State of H.P.[7] are summarised below:

  • Decision of the Delhi High Court, in Proex Fashion[8] holding that there are five conditions for invocation of Section 83 of the CGST, which stand approved in para 41 of the Supreme Court decision.
  • Decision of the Gujarat High Court, in Valerius Industries[9] which laid down principles for construction of Section 83 of the SGST/CGST Act. The High Court held that provisional attachment on the basis of a subjective satisfaction, absent any cogent or credible material, constitutes malice in law; vague, indefinite, distant, remote or far-fetching material would not warrant provisional The High Court further went on to lay down the conditions which would permit provisional attachment: (a) where there exists “reasonable apprehension” that the assessee may default the collection of the demand; (b) where there is sufficient material on record to justify the satisfaction that the assessee is about to dispose of wholly or any part of his/her property with a view to thwarting the ultimate collection of demand and in order to achieve the said objective, the attachment should be of the properties and to that extent, it is required to achieve this objective; and (c) provisional attachment power is to be used only as a last resort measure. The power under Section 83 of the Act should neither be used as a tool to harass the assessee nor should it be used in a manner which may have an irreversible detrimental effect on the business of the assessee.
  • In Jay Ambey Filament[10] the Gujarat High Court further expounded the above reasoning, holding that on his opinion being challenged, the competent officer must be able to show the material on the basis of which the belief is formed.
  • Decision in UFV India Global Education[11] of the Punjab and Haryana High Court which held that pendency of proceedings under the provisions mentioned in Section 83 (viz. Sections 62 or 63 or 64 or 67 or 73 or 74) is the sine qua nonfor an order of provisional attachment to be directed under Section 83.
  • Decision of the Bombay High Court in Kaish Impex[12] which considered a similar question regarding the application of Section 83. In this case the tax authorities traced money trail in tax fraud by an export firm and provisionally attached the bank accounts of the petitioner. The issue before the High Court was whether the petitioner’s assets could be attached considering the fact pattern that the proceedings were against another taxable entity. The High Court noted that the proceedings referred to under Section 83 of the Act must be pending against the taxable entity whose property is being attached. It inter alia observed:

 

  1. 18. … Section 83 does not provide for an automatic extension to any other taxable person from an inquiry specifically launched against a taxable person under these provisions. … The format of the order i.e. Form GST DRC-22 also specifies the particulars of a registered taxable person and which proceedings have been launched against the aforesaid taxable person indicating a nexus between the proceedings to be initiated against a taxable person and provisional attachment of bank account of such taxable person.

 

In short, contextualising the observations of the High Courts, the Supreme Court streamlined the legal position regarding the power of provisional attachment available to GST officers seeking to balance the tax recovery objective underlying the power while preserving the legitimate rights of the taxpayers.

 

  1. Conclusion

Any decision of the Supreme Court, given its constitutional authority under Article 141 as being binding on all courts and authorities in India, settled the controversy and lays down the law of the land. However, this decision is relevant on multiple counts not just in the context of the immediate facts but much beyond. Some of the salient aspects are enlisted below:

  • First, as discussed above, the Supreme Court has streamlined the legal position regarding the power of provisional attachment available to GST officers. This is crucial because GST is a relatively new tax and, more critically, cited as a reform. Thus, it is crucial that its provisions are interpreted uniformly across the country and that too in a humane manner such that their indiscriminate application does not derail the underlying objective of the new tax regime.
  • Second, the decision of the Supreme Court is not just based upon interpretation of the statutory provisions. Instead, it seeks to achieve a delicate balance protecting government revenue and allowing genuine businesses to operate, evidently in furtherance of underlying objective of making the GST law workable.
  • Third, the jurisprudential intercourse sought to be embedded in the scheme of provisional attachment related statutory provisions clearly dispels the long-standing tradition of the Supreme Court wherein the principle of natural justice and fair play are sought to be read in the fiscal laws, thereby ensuring that they remain within the constitutional precincts and do not trample upon the fundamental rights of the taxpayers, indulging the right for reasonable and balanced application of fiscal laws. To this effect, inter alia, the Supreme Court rightly dismissed the contention to grant higher sanctity to discretion of the GST Commissioner, thereby ensuring that the rights of the taxpayers are protected by a fair interpretation of the taxing statute.
  • Fourth, on a larger level, by confirming High Court’s supervision of tax officers’ actions under the extraordinary writ jurisdiction even though the statutory provisions do not provide any legal remedy to the aggrieved taxpayer, the Supreme Court has not just ensured that the taxpayer is not left remediless and instead introduced a mechanism to ensure tax officers’ accountability. No executive power can be exercised without effective supervision, much less a wide and potent power to attach assets which cannot only put fetters upon business operations of any entity but can also put strenuous effect on the very survival of business. In such circumstance, it is only appropriate that the exercise of such power is supervised by a constitutional court such that it can ensure balance between the law’s objective and the rights of the affected party.
  • Fifth, by reading into the law twin tests, the doctrine of proportionality and “tangible material”, the Supreme Court has adverted to the conditions necessary to make the law fair and reasonable which is a constitutional Absence of such tenets do not ipso facto make the law unconstitutional but by reading them into the law, the Supreme Court has ensured that arbitrariness and capricious conduct is not perpetrated in the garb of exercising statutory functions. Thereby the Supreme Court has protected genuine persons from unwarranted harassment and obviated the possibility of unguided discretion leading to peril of arbitrary power.

 

In short, this decision of the Supreme Court is a welcome addition to tax jurisprudence and incremental vindication of taxpayers’ rights.

 


† Tarun Jain, Advocate, Supreme Court of India; LLM (Taxation), London School of Economics.

The author would like to thank Vanaj Vidyan, Fourth Year Student at Ram Manohar Lohia National Law University for his able assistance.

[1] The provision states that “[w]here, during the pendency of any proceeding under this Act or after the completion thereof, but before the service of notice under R. 2 of the Second Schedule, any assessee creates a charge on, or parts with the possession (by way of sale, mortgage, gift, exchange or any other mode of transfer whatsoever) of, any of his assets in favour of any other person, such charge or transfer shall be void as against any claim in respect of any tax or any other sum payable by the assessee as a result of the completion of the said proceeding or otherwise”.

[2] 2021 SCC OnLine SC 334.

[3] (2010) 2 SCC 723.

[4] (2018) 6 SCC 685.

[5] Radha Krishan Industries v. State of H.P., 2021 SCC OnLine HP 4566 : (2021) 48 GSTL 3.

[6] Bindal Smelting (P) Ltd. v.  Directorate General of GST Intelligence, 2019 SCC OnLine P&H 6015 : (2020) 34 GSTL 592; Society for Integrated Development in Urban and Rural Areas v. CIT2001 SCC OnLine AP 1457 : (2001) 252 ITR 642; Vinodkumar Murlidhar Chechani v. State of Gujarat, 2020 SCC OnLine Guj 3010.

[7] 2021 SCC OnLine SC 334.

[8] Proex Fashion (P) Ltd.  v. Govt. of India,  2021 SCC OnLine Del 2082.

[9]Valerius Industries v. Union of India, 2019 SCC OnLine Guj 6866 : (2019) 30 GSTL 15.

[10] Jay Ambey Filament (P) Ltd. v. Union of India, 2020 SCC OnLine Guj 3009 : (2021) 44 GSTL 41.

[11]UFV India Global Education v. Union of India, 2020 SCC OnLine P&H 2796 : (2020) 43 GSTL 472.

[12]Kaish Impex (P) Ltd. v. Union of India, 2020 SCC OnLine Bom 125 : (2020) 6 AIR Bom R 122.

Akaant MittalExperts Corner

Recapitulation

The present column post will conclude the 3-part series on the law of limitation and its interplay with the Insolvency and Bankruptcy Code, 2016 (IB Code).

 

In the first part of the column, we had discussed the initial issues in the interplay of IB Code with the law on limitation and how they were resolved by the insertion of Section 238-A to the IB Code and the Supreme Court rulings in B.K. Educational Services[1] and Vashdeo R. Bhojwani v. Abhyudaya Cooperative Bank Ltd.[2] We also discussed the recent ruling of the Supreme Court in Sesh Nath Singh v. Baidyabati Sheoraphuli Cooperative Bank Ltd.[3] which provided some respite as far as Section 14 of the Limitation Act is concerned and how a creditor can use that provision to seek extension of limitation period.

 

In the second part of the column, we discussed the applicability of Section 18 of the Limitation Act to the applications seeking initiation of resolution process under the IB Code. The missed opportunities of Babulal Vardharji[4] now stand settled conclusively by the rulings in Laxmi Pat[5]. Similarly, the limitation issues concerning the acknowledgment of debt for the purposes of Section 18 of the Limitation Act by virtue of entries in balance sheets of a company was settled by the Supreme Court in Asset Reconstruction Co.[6] ruling.

 

In this third part, we will discuss the issue of the effect of Section 19 of the Limitation Act, 1963 which stipulates the “effect of payment on account of debt or of interest on legacy” on an application seeking initiation of resolution process under the IB Code.

 

Brief on Section 19 of the Limitation Act, 1963

 

  1. Effect of payment on account of debt or of interest on legacy.—Where payment on account of a debt or of interest on a legacy is made before the expiration of the prescribed period by the person liable to pay the debt or legacy or by his agent duly authorised in this behalf, a fresh period of limitation shall be computed from the time when the payment was made:

Provided that, save in the case of payment of interest made before the 1st day of January, 1928, an acknowledgment of the payment appears in the handwriting of, or in a writing signed by, the person making the payment.

 

To attract the application of Section 19, two conditions are essential (i) the payment must be made within the prescribed period of limitation; and (ii) it must be acknowledged by some form of writing, either in the handwriting of the payee himself or signed by him.

 

Applicability of Section 19 of the Limitation Act, 1963 to IB Code

The National Company Law Appellate Tribunal (NCLAT) has been confronted on several occasions where partial payment of the debt or payment of interest has been made by the debtor on account of the debt.

 

For instance in Neha Himatsingka v. Himatsingka Resorts (P) Ltd.[7] the argument that the debt in question was time barred was rejected. The NCLAT noted that as per the record the corporate debtor had paid interest even after the year 2016-2017 and also issued cheques in the year 2018; therefore, the argument that the claim is time barred was rejected.

 

Similarly in T. Johnson[8], the creditor relied upon (1) the revival letter dated 20-2-2016; (2) balance confirmation letter dated 22-2-2016 by the corporate debtor; and (3) the factum of last payment having been made on 14-11-2017 to establish that its claim is not time barred.

 

The NCLAT noting that apart from the above, there is an admission on the part of the corporate debtor on the basis of the written submissions of the appellant before the National Company Law Tribunal (NCLT) and the fact that the appellant debtor is merely disputing the correctness of the quantum of balance claimed by the financial creditor rejected the argument that the claim is time barred.[9]

 

As we have seen in the previous columns, in the rulings of Laxmi Pat[10], Sesh Nath[11] and Asset Reconstruction Co.[12] the Supreme Court has settled that the phrase “the provisions of Limitation Act have been made applicable to the proceedings under the Code, as far as may be applicable” in Section 238-A of the IB Code means that all the relevant provisions of the Limitation Act can be invoked while filing an application under the IB Code. The same in those cases meant that Sections 5, 14 and 18 of the Limitation Act were invoked to extend limitation period.

 

Now the recent ruling of the NCLAT ruling in Rajendra Narottamdas Sheth v. Chandra Prakash Jain,[13] provides us with a more useful reference point to understand the interplay between Section 19 of the Limitation Act, 1963 with the IB Code.

 

In Rajendra Narottamdas[14], the account of the debtor was declared as a non-performing asset (NPA) on 30-9-2014 and the financial creditor filed an application seeking initiation of corporate insolvency resolution process (CIRP) against the debtor on 25-4-2019.[15] The debtor claimed that the application is time barred as it was beyond the three-year limitation period that commenced on the date of the NPA.[16] The financial creditor argued that the limitation period got extended on account of Section 18 of the Limitation Act by relying on the documents showing acknowledgments of debt by the corporate debtor in writing. The creditor also placed reliance on the statements of accounts showing various instalments paid on account of debt and interest, even after the declaration of NPA to invoke the application of Section 19 of the Limitation Act.[17]

 

The NCLAT referred to the following undisputed facts where: (a) the corporate debtor had issued balance confirmation letter dated 7-4-2016 and acknowledged the debt; (b) the account statements showed regular credit entries after 7-4-2016 till May 2018; and (c) the corporate debtor issued a letter dated 17-11-2018 giving details of amounts repaid till 30-9-2018 and acknowledging amount outstanding in respective accounts as on that date.

 

On the basis of these facts, the NCLAT held that the benefit of Sections 18 and 19 were attracted and the application by the creditor was not time barred.[18]

 

Conclusion

 

If the reasoning in Sesh Nath[19], Laxmi Pat[20] and Asset Reconstruction Co.[21] is to be accepted that the “provisions of Limitation Act have been made applicable to the proceedings under the Code, as far as may be applicable”[22], then clearly Section 19 of the Limitation Act can be used to extend limitation period. To that effect, the ruling of the NCLAT in Rajendra Narottamdas[23] shows the way ahead for the application of Section 19 of the Limitation Act to the IB Code.


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

The author gratefully acknowledges the research and assistance of Sh. Abhishek Jain, 3rd Year, B.A.LLB. (Hons.), Student at National University of Juridical Sciences, Kolkata, in writing this article.

 

[1] B.K. Educational Services (P) Ltd. v. Parag Gupta and Associates, (2019) 11 SCC 633 : (2018) 5 SCC (Civ) 528.

[2] (2019) 9 SCC 158 : (2019) 4 SCC (Civ) 308.

[3] 2021 SCC OnLine SC 244.

[4]Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries (P) Ltd., (2020) 15 SCC 1 : 2020 SCC OnLine SC 647.

[5] Laxmi Pat Surana v. Union Bank of India, 2021 SCC OnLine SC 267.

[6] Asset Reconstruction Co. (India) Ltd. v. Bishal Jaiswal, 2021 SCC OnLine SC 321.

[7] 2018 SCC OnLine NCLAT 784.

[8] T. Johnson v. Phoenix ARC (P) Ltd., 2019 SCC OnLine NCLAT 244.

[9] Id., para 6.

[10] 2021 SCC OnLine SC 267.

[11] 2021 SCC OnLine SC 244.

[12] 2021 SCC OnLine SC 321.

[13] 2020 SCC OnLine NCLAT 827.

[14] Id.

[15] Id, para 3.

[16] Id, para 4.

[17] Id, para 8.

[18] Id, paras 24-27.

[19] 2021 SCC OnLine SC 244.

[20] 2021 SCC OnLine SC 267.

[21] 2021 SCC OnLine SC 321.

[22] Laxmi Pat Surana, 2021 SCC OnLine SC 267, para 41.

[23] 2020 SCC OnLine NCLAT 827.