Karnataka High Court
Case BriefsHigh Courts


Karnataka High Court: A Division Bench of PS Dinesh and Anant Pamana Hegde, JJ. rejected the appeal filed by Commissioner of Central Tax and considered that Customs, Excise & Service Tax Appellate Tribunal (‘CESTAT') was right in dropping the demand for extended period mainly on the ground that the details of trading were available in the balance sheet of the respondent during the relevant period and that there was much confusion during the relevant period as to whether credit could be availed in respect of trading activities.

ABB Limited (‘respondent') was engaged in the business of manufacture and clearance of turbo chargers, electric motor, transformer etc. falling under Chapter 85 of Central Excise Tariff Act, 1985 (‘CETA, 1985') and provides taxable output services such as management, maintenance, repairs etc. and for the purpose of payment of service tax they have obtained service tax registration.

Based on the intelligence report, a show cause notice was issued stating that apart from manufacturing, respondent was also engaged in trading of electrical goods under the trade name ‘ABB' and it had wrongly utilized the CENVAT credit in relation to the trading activity and was further called upon to show cause as to why Rs.5,68,00,000/- should not be treated as wrongful availment of CENVAT credit and recovered from it under Rule 14 of the CENVAT Credit Rules, 2004 read with proviso to Section 73 of the Finance Act, 1994 and proviso to Section 11-A of the Central Excise Act, 1944.

A reply was filed by the respondent holding that the CENVAT credit was inadmissible for trading activities, and it was disallowed. Further directions were issued for appropriation of the said sum in the CENVAT account, and it was paid under protest. On appeal, the Customs, Excise & Service Tax Appellate Tribunal (‘CESTAT') held that there was no suppression of facts on the part of the assessee with an intent to evade payment of tax and it confirmed the demand only for normal period i.e., disallowed appropriation of the payment made under protest and interest at applicable rate and penalty of equal sum holding that there was no evasion of payment of tax and set-aside the demand for the extended period of limitation and confirmed the demand only for the normal period. The penalty relating to the normal period was also set aside during the relevant period on the grounds that there was much confusion on the availment of credit for trading activities. Aggrieved by the same, the revenue ‘appellant' has filed the instant appeal.

Counsel for appellant Adv. Jeevan J Neeralgi, submitted that the assessee did not declare its trading activities in the returns and based on the intelligence report, the department learnt about the trading activities of the assessee. The findings recorded by the CESTAT in its order that the department was well aware of the trading activity of the respondent are factually incorrect. Though the said finding is a matter of fact, since it is perverse on the face of it, it amounts to a question of law.

Counsel for respondent Adv. Ravi Raghavan submitted that the show cause notice issued was on the basis of the balance sheet wherein all activities of the assessee were truly declared. Therefore, there was no suppression of material facts. Further, it is trite law that when an assessee has acted in good faith, invoking an extended period of limitation is not tenable.

Reliance was placed on Asst. Commissioner of GST v. Shriram Value Services Pvt. Ltd., (2019) 368 ELT 928 Mad. wherein it was observed

“it is clear that the position was clarified by the Government by insertion of Explanation only with effect from 1-4-2011 that the trading activity will be Exempted Services. The Explanation is clarificatory in nature and can be held to be applicable even for the past period. Thus, at the relevant period of time. Viz., from April 2009 to March 2011, the Assessee was, obviously, under bona fide belief in view of the conflicting decisions of the Tribunals during that period and taking the trading activity as Exempted Services, availed the CENVAT Credit which is sought to be reversed and recovered by the Department invoking the extended period of limitation. Such a bona fide belief cannot be held to be done with ulterior purpose for evading the Duty and therefore, the extended period of limitation would not be available to the Revenue Authority in view of the aforesaid decision rendered by the Hon'ble Supreme Court”.

The Court held that the substantial questions raised by the Revenue are answered in favour of the assessee. Hence, the appeal was dismissed with no costs. dismissed. No costs.”

[Commissioner of Central Tax v. ABB Limited, Central Excise Appeal No. 16 of 2021, decided on 01-06-2022]

*Arunima Bose, Editorial Assistant has reported this brief.

Case BriefsHigh Courts

Delhi High Court: The Division Bench of Manmohan and Manmeet Pritam Singh Arora, JJ., expressed that, merely because there was a delay of one day in asking for an adjournment, the assessee living outside India cannot be denied his Right to file an objection to Show Cause notice.

The present petition had been filed challenging the order passed under Section 148 A (d) of the Income Tax Act, 1961 and the notice was passed under Section 148 of the Act.

Petitioner’s counsel submitted that the impugned order had been passed without considering the petitioner’s request for adjournment dated 9-4-2022 as well as 12-4-2022 and a detailed reply dated 13-4-2022 to the show cause notice.

Respondents- revenue stated that the adjournment request had not been filed within the stipulated time and therefore, the Assessing Officer was well within its right to pass the order under Section 148A(d) of the Act.

Analysis, Law and Decision

The High Court stated that the petitioner-assessee has a right to get adequate time in accordance with the Act to submit its reply.

“Section 148 A (b) permits the Assessing Officer to suo moto provide up to thirty days period to an assessee to respond to the Show Cause Notice issued under Section 148A(b), which period may in fact be further extended upon an application made by the Assessee in this behalf, and such period given to the assessee is excluded in computing the period of limitation for issuance of notice under Section 148 of the Act in terms of the third proviso to Section 149 of the Act.” 

High Court remarked that since the petitioner-assessee was a resident of the United States of America, the Court was of the view that the delay of one day in asking for an adjournment should not have led to the closure of the right to file a reply to the Show Cause Notice.

The Bench quashed the impugned orders and directed respondent 1 to pass a fresh reasoned order under Section 148 A(d) after considering the reply filed by the petitioner. [Ernst and Young U.S. LLP v. ACIT, 2022 SCC OnLine Del 1529, decided on 20-5-2022]

Advocates before the Court:

For the Petitioner:

Mr S. Ganesh, Sr. Advocate with Ms Soumya Singh and Ms Ananya Kapoor, Advocates.

For the Respondents:

Mr Puneet Rai with Ms Adeeba Mujahid and Mr Karan Pandey, Advocates.

Op EdsOP. ED.

As of December 2020, total wilful defaults amounted to INR 2,44,602 crores from 12,917 accounts.[1] This number has grown even bigger in the year 2021. Many of these accounts includes defaulters like Gitanjali Gems, ABG Shipyard, Ruchi Soya Industries Limited, Nakshatra Brands Limited and Coastal Projects Limited, among others.[2] This increasing tally of bad loans amply indicates[3] that this has a significant impact on the growth of India’s financial system and lack of credit availability in the market. However, it also indicates that the banking and finance sector is mindful of the regulatory and legal recourses available to them to timely identify such problematic accounts and have them subjected to the tough and stringent action, including actions meant not only to deter future wilful defaults but also to prevent access of further finance to such defaulters.

The Circular dated 1-7-2013 titled as Master Circular on Wilful Defaulters (RBI Circular, 2013)[4], issued by Reserve Bank of India (RBI) has assumed much significance in this regard. By way of this circular, RBI has sought to put in place a system whereby banks and financial institutions (FIs) attempt to lower the number of wilful defaults by the borrowers and penalise them for defaulting by disseminating the credit information among other banks and FIs to caution them and ensure that further bank finance is denied to the borrowers who have been declared to be a“wilful defaulter”.[5]

In 2015, RBI sought to strengthen the RBI Circular, 2013 by issuing Master Circular of 1-7-2015 (Master Circular, 2015). By way of the Master Circular, 2015, RBI widened the scope and extended the definition of the term “lender” to include all banks and financial institutions to whom any amount is due under a banking transaction. It also clarified that a banking transaction would also include transaction not on the balance sheet such as derivatives, guarantees and letters of credit.[6]This resulted in defaults with respect to such transactions being considered as wilful default and widened the scope thereof.

Master Circular, 2015: Scope

The Master Circular, 2015 defines “wilful defaulter” to mean any “unit” which defaults in meeting payment/repayment obligations to the “lender”, (i)even when it has capacity to honour it[7]; or (ii) has diverted the funds of the lender to things other than for which he has taken up such finance[8]; or (iii) has siphoned off the funds such that the funds are neither utilised for the purpose it was taken for nor it is available in the form of other assets with the unit[9]; or (iv) has disposed of or removed the movable fixed assets or immovable property pledged for securing the loan without the knowledge of the lender.[10]

By defining who can be a “wilful defaulter”, Master Circular, 2015 has delineated the incidents which would amount to a “wilful default”. It further defines the term “unit” to include individuals, juristic persons, and all other forms of business enterprises, whether incorporated or not, and such other persons who have the responsibility of managing the affairs of a business enterprise. This wide definition of “unit” has also enlarged the applicability of the Master Circular, 2015, as detailed below.

Liability of Directors: Defaults by company

From the definition of “unit”, it is evident that a wilful defaulter includes a company and the individuals who are in charge and responsible for managing the affairs of the company which is said to have wilfully defaulted. The Master Circular, 2015 mandates reporting of the names of such individuals, which typically include the promoters and whole-time directors.[11]It further provides that, except in very rare cases[12], a non-whole-time director should not be considered as a wilful defaulter. It is only when it is conclusively established that such a non-whole-time director was aware of the fact of wilful default by the borrower by virtue of any proceedings recorded in the minutes of meeting of the Board or if the wilful default had taken place with his consent or connivance, can such a director be held liable.[13]However, such exception is not applicable in case of a promoter director, even if he or she is not a whole-time director.

Under the Master Circular, 2015, in cases where a company is declared to be a wilful defaulter, there is an automatic presumption that the promoter/whole-time director who is in control of such a company, at the relevant time, is also liable to be declared a wilful defaulter.

However, such presumption is limited to only such promoters/whole-time directors who were/are associated with the company within a period of 90 days prior to the time the company account was classified as non-performing asset. It is because of the reason that the classification of an account as non-performing asset is made after the required repayments in the loan account remain overdue for a continuous period of 90 days. Thus, identifying such officials who were associated with the company at the time when the company committed acts that led to the default is necessary as these officials are responsible for such omissions or commissions of the company.[14]

Procedure for declaring “wilful defaulter”

The Master Circular, 2015 provides a detailed procedure for the banks and FIs to undertake while identifying and reporting instances of wilful defaults. The broad steps under the Master Circular, 2015 are as under:

  1. Step I: A three-member committee comprising of two senior officers of the rank of General Manager/Deputy General Manager, headed by an Executive Director or equivalent (First Committee/Identification Committee/Screening Committee) is to examine the evidence of wilful default on the part of the borrowing company and its promoter/whole-time director at the relevant time[15].
  2. Step 2: If, the First Committee concludes that an event of wilful default has occurred, it shall issue a show-cause notice to the borrower concerned and/or the promoter/whole-time director and call for their submissions/representations as to why they should not be declared a “wilful defaulter”. After considering their submissions, the First Committee may issue an order recording or rejecting the fact of wilful default and the reasons for the same.[16]

An opportunity may be given to the borrower and/or the promoter/whole-time director for a personal hearing if the First Committee feels such an opportunity is necessary. However, such opportunity does not confer a right to the borrower and the promoter/whole-time director to be represented by a lawyer before the First Committee as it is not judicial but an in-house proceeding.[17]

  1. Step 3: The order of the First Committee, in case wilful default is recorded, should be reviewed by a Second Committee headed by the Chairman/Chairman & Managing Director or the Managing Director & Chief Executive Officer/CEOs and consisting, in addition, two independent directors/non-executive directors of the bank (Review Committee).[18]The order passed by the First Committee shall become final only after it is confirmed by the said Review Committee.

Additional checks and balances to prevent arbitrary exercise of powers

While the aforesaid procedure is robust, one could argue it had scope for abuse. The Supreme Court[19]considering the severe implications of such a declaration, has added some additional checks and balances to further bolster the fairness of this process. The Supreme Court has incorporated following in this regard:

  1. the First Committee must supply a copy of its order to the borrower as soon as it is made;[20]
  2. the borrower must be given an opportunity to represent against such an order of the First Committee within a period of 15 days to the Review Committee;
  3. the Review Committee, at the time of passing its reasoned order, must take into consideration the representation made by the borrower/its director(s); and
  4. once the aforesaid procedure is properly followed, the order of the Review Committee must be communicated to the borrower and its director(s).

The aforesaid procedure laid down by the RBI in the Master Circular, 2015, and later supplemented by the Supreme Court, ensures that the principles of natural justice are not violated while making declaration of “wilful default”. It ensures that prior to any borrower being classified as a wilful defaulter, adequate opportunity is provided to such borrower to make representations against such declaration before the Review Committee, comprising of high-ranking officials of the Bank.[21]

Challenges by borrowers to declaration of “wilful defaulter”

Since, declaration of a wilful defaulter has far-reaching civil and criminal consequences,[22]it is only natural that there is substantial litigation surrounding it. In the absence of grievance redressal mechanism under the Master Circular, 2015, invocation of writ jurisdiction of a High Court is the only option available for an aggrieved person. The common grounds of challenge in such petitions are usually as below:

Challenge at the stage of issuance of show-cause notice

  1. The constitution of the First Committee issuing the show-cause notice is not in knowledge of the person declared as “wilful defaulter”, or that the First Committee is not formed as per the terms of the Master Circular, 2015.[23]
  2. The show-cause notice is not signed or issued by all the members of the First Committee.[24]
  3. The First Committee did not apply its mind to the case, and instead delegated the work to another agency instead of forming its own opinion by conducting its own independent enquiry.[25]
  4. The proposal classifying a person as wilful defaulter is not substantiated with documents constituting event of “wilful default”.[26]

Challenge to the decision of the First Committee/Review Committee

  1. The First Committee/Review Committee premeditated and concluded that the events of default have been committed by the defaulter.[27]
  2. The precise facts to conclude that an event of wilful default has occurred is not provided and/or that the relevant documents have not been supplied to the borrower, therefore, there is a violation of principles of natural justice[28].
  3. The opportunity to represent before the First Committee/Review Committee is not provided or the representations/submissions of the alleged defaulter is not considered by the First Committee/Review Committee while passing an order of wilful default Therefore, such an order is not a reasoned order[29].
  4. Review Committee did not apply its own mind while assessing the correctness of the opinion of the Identification Committee.[30]
  5. The order of the First Committee declaring the borrower a “wilful defaulter” is not supplied to the borrower.[31]
  6. The director cannot be made liable without classifying the company as wilful defaulter.[32]
  7. The Director was not a person associated with the company in default during the relevant period.[33]
  8. That the moratorium under Insolvency and Bankruptcy Code, 2016[34] is imposed on the debts and defaults of the company[35]; or that the company stands absolved of the debt[36].

With increasing challenges to the declaration of “wilful default”, the judicial position on these aspects is further developing day by day. For instance, in most of these cases involving challenge to the show-cause notice, courts have adopted a uniform approach to reject such challenge on the preliminary ground of it being premature[37] as no actions has yet been taken making the borrower aggrieved.

Earlier the position of law, however, was not uniform across various High Courts in this regard. For instance, the Calcutta High Court in Atlantic Projects Ltd. v. Allahabad Bank[38]had held that Master Circular, 2015 does not envisage that the First Committee can even delegate the ministerial task of issuance of show-cause notice to a subordinate, on the ground that the Master Circular, 2015 requires it to apply its own mind to even the task of issuance of show-cause notice. On the other hand, the Delhi High Court in Sanjay Singal v. SBI[39]and the Division Bench of the Calcutta High Court in Union Bank of India v. Sudhir Kumar Patodia[40]had set aside similar challenge and held that it is the First Committee which examined the conduct of the borrower and the utilisation of credit facilities before proposing classification of the account as wilful default, and it was only the mere act of communicating such proposal vide issuance of show-cause notice which has been delegated.

It can therefore be said that the law on this subject is still in a nascent stage and/or remains an enigma for both the lenders and the borrowers as all the possible issues and disputes arising out of the Master Circular, 2015 are yet to be conclusively addressed or settled. However, there is no doubt that, in the current economic scenario, the Master Circular, 2015 remains an important ammunition in the lender’s arsenal, provided the procedure envisaged thereunder is followed in letter and spirits.

*Partner, Cyril Amarchand Mangaldas and “Top Individual Lawyer”, Forbes Legal Powerlist 2021.

**Principal Associate Designate, Cyril Amarchand Mangaldas.

***Senior Associate, Cyril Amarchand Mangaldas.

[1] George Mathew and Khushboo Narayan, Amid Covid Effect, Bank Steps, Wilful Defaults Rise Rs 38,976 crores, Indian Express, 11-5-2021, available at https://indianexpress.com/article/business/amid-covid-effect-bank-steps-wilful-defaults-rise-rs-38976-crore-7309969/.

[2] Nachiket Kelkar, 2,426 Wilful Defaulters Owe Rs 1.47 Lakh Crores to State-owned Banks, Reveals Bank Union, The Week, 18-7-2020, available at <https://www.theweek.in/news/biz-tech/2020/07/18/2426-wilful-defaulters-owe-rs-147-lakh-crore-to-state-owned-banks-reveals-bank-union.html>.

[3]Rise by over INR 38,976 Crores from the Default as of December 2019. See George Mathew and Khushboo Narayan, Amid Covid Effect, Bank Steps, Wilful Defaults Rise Rs 38,976 Crores, Indian Express, 11-5-2021, available at https://indianexpress.com/article/business/amid-covid-effect-bank-steps-wilful-defaults-rise-rs-38976-crore-7309969/.

[4]Master Circular on Wilful Defaulters, RBI/2013-14/63 dated 1-7-2013.

[5]See also, Sudarshan Overseas Ltd. v. RBI, 2009 SCC OnLine Del 1656, para 13:

  1. A borrower who is a wilful defaulter can otherwise go to different banks or financial institution and obtain loans. Past conduct of wilful default by way of diversion and siphoning off funds, etc. is always a relevant consideration for deciding whether or not additional funds/facilities should be granted. Past conduct as a wilful defaulter should be in the knowledge of bank/financial institutions advancing the money. The Master Circular obviously has a laudatory purpose behind it and cannot be rejected.

[6]Guidelines on Wilful Defaulters— Clarification regarding Guarantor, Lender and Unit, accessed at <http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=9224&Mode=0>.

[7]Master Circular, 2015, Para 2.1.3(a).

[8] Master Circular, 2015, Para 2.1.3(b).

[9]Master Circular, 2015, Para 2.1.3(c).

[10]Master Circular, 2015, Para 2.1.3(d).

[11]Master Circular, 2015, Regn. 3.

[12]Kailash Shahra v. IDBI Bank Ltd., 2019 SCC OnLine Bom 3279, para 35.

[13]Master Circular, 2015, Regn. 3(d).

[14]Ramesh Kumar Sareen v. Union of India, 2016 SCC OnLine Del 3374.

[15]Master Circular, 2015, Regn. 3(a).

[16]Master Circular, 2015, Regn. 3(b).

[17]SBI v. Jah Developers (P) Ltd., (2019)6 SCC 787 (Jah Developers).

[18] It may be noted that the First Committee and the Review Committee are constituted with different officials to ensure a process of impartiality and objectivity to the final decision of the Bank.

[19]SBI v. Jah Developers, (2019) 6 SCC 787.

[20]In SBI v. Jah Developers, (2019) 6 SCC 787, 803, Supreme Court also analysed the RBI Circular 2013 and observed that:

  1. 24. … given the fact that Para3 of the Master Circular dated 1-7-2013 permitted the borrower to make a representation within 15 days of the preliminary decision of the First Committee, we are of the view that first and foremost, the Committee comprising of the Executive Director and two other senior officials, being the First Committee, after following Para3(b) of the Revised Circular dated 1-7-2015, must give its order to the borrower as soon as it is made….Given the fact that the earlier Master Circular dated 1-7-2013 itself considered such steps to be reasonable, we incorporate all these steps into the Revised Circular dated 1-7-2015.

[21]See also, Sudarshan Overseas Ltd. v. RBI, 2009 SCC OnLine Del 1656 : (2009) 160 DLT 77. In this case, challenge was made to Master Circular dated 2-7-2007 on wilful defaulters. The  Delhi High Court held that the circular lays guidelines for banks and FIs, which they have to necessarily adhere to, and enough safeguards are provided for the protection of the borrowers, and in case of violations, complaints can be made as the action to declare borrower as wilful defaulter is an internal action of the bank and such declaration can only be made after hearing the representation and giving right to hearing. Thus, the circular was held to have enough safeguards as to differentiate between wilful defaulter and genuine borrowers.

[22] The consequences of being declared a wilful defaulter includes:

  1. no additional facilities to be granted by any bank/financial institution [Master Circular, 2015, Para 2.5(a)];
  2. entrepreneurs/promoters would be barred from institutional finance for a period of 5 years [Master Circular, 2015, Para 2.5(a)];
  3. any legal proceedings can be initiated, including criminal complaints [Master Circular, 2015, Para 2.5(a)];
  4. banks and financial institutions to adopt proactive approach in changing the management of the wilful defaulter [Master Circular, 2015, Para 2.5(c)];
  5. promoter/Director of wilful defaulter shall not be inducted by another borrowing company [Master Circular, 2015, Para 2.5(d)]; and
  6. as per 29-A of the Insolvency and Bankruptcy Code, 2016, a wilful defaulter cannot be a resolution applicant.

[23]Sandip Kumar Bajaj v. SBI,2020 SCC OnLine Cal 1659.

[24]Union Bank of India v. Sudhir Kumar Patodia, 2020 SCC OnLine Cal 3259.

[25]Union Bank of India v. Sudhir Kumar Patodia, 2020 SCC OnLine Cal 3259.

[26]Kingfisher Airlines Ltd. v. Union of India, 2014 SCC OnLine Del 7731.

[27]Siemens Ltd. v. State of Maharashtra, (2006) 12 SCC 33; see also, Union Bank of India v. Sudhir Kumar Patodia, 2020 SCC OnLine Cal 3259.

[28]Ionic Metalliks v. Union of India, 2014 SCC OnLine Guj 10066; Narendra Seoomal Sabnani v. SBI, 2021 SCC OnLine Bom 4604..

[29]Aap Infrastructures Ltd. v. Bank of Baroda, 2019 SCC OnLine Del 9670; see also, Frost International Ltd. v. Punjab National Bank, 2021 SCC OnLine Del 3683.

[30]Senthil Arumugasamy v. SBI, 2021 SCC OnLine Mad 2899.

[31]Aap Infrastructures Ltd.v. Bank of Baroda, 2019 SCC OnLine Del 9670.

[32]Ishwari Prasad Tantia v. IDBI Bank Ltd., 2021 SCC OnLine Cal 3683.

[33]Ramesh Kumar Sareen v. Union of India, 2016 SCC Online Del 3374.

[34]Insolvency and Bankruptcy Code, 2016.

[35]Gouri Prasad Goenka v. SBI, 2021 SCC OnLine Cal 1942; see also, Union Bank of India v. Sudhir Kumar Patodia, 2020 SCC OnLine Cal 3259.

[36]Ishwari Prasad Tantia v. IDBI Bank Ltd., 2021 SCC OnLine Cal 3683.

[37]Ganpatlal Pawan Kumar Traders (P)Ltd. v. RBI, 2019 SCC OnLine Cal 6941.

[38]2019 SCC OnLine Cal 611.

[39] 2020 SCC OnLine Del 2127.

[40]2020 SCC OnLine Cal 3259.

Case BriefsHigh Courts

Calcutta High Court: Md. Nizamuddin, J. allowed a petition which was filed challenging the impugned assessment order under Section 147 read with Section 144B of the Income Tax Act, 1961 relating to assessment year 2013-2014 on the ground of violation of principle of natural justice by not providing the petitioner with an opportunity to file reply to the show-cause-notice.

The show cause notice asked the petitioner to give his reply/show-cause-notice to the proposed draft assesment through Department’s Register e-filing account by 23:17:59 hours IST of 30-03-2022, on the ground that before expiry of such time granted to file such reply/objection to the aforesaid showcause- notice/draft assessment. Respondent/Assessing Officer passed the impugned assessment order on 30-03-2022 at 15:17:08 IST and it is the specific case of the petitioner that the petitioner could not file reply or objection to the aforesaid show-cause-notice due to technical glitches in the portal of the Department.

The Court was of the view that the impugned assessment order which had been passed before the expiry of the time granted by the Assessing Officer to the petitioner to file reply to the aforesasid show- cause-notice relating to the draft assessment in question and further in view of the technical glitches in the portal of the Department by which petitioner could not file his aforesaid objection.

The Court found that the impugned assessment order is not sustainable in law and the same was set aside and the case was remanded back to the Assessing Officer concerned to pass a fresh assessment order in accordance with law after giving an opportunity to the petitioner to file reply to the aforesaid show-cause-notice which shall be filed by the petitioner within seven days from date and shall pass a reasoned and speaking order and by observing principle of natural justice.[Bhadrish Jayantilal Sheth v. Income Tax Officer, WPA 8232 of 2022, decided on 17-05-2022]

Mr Avra Majumder, Sk. Md. Bilwal Hossain : For the Petitioner.

Mr Om Narayan Rai :  For the Respondents

Suchita Shukla, Editorial Assistant has reported this brief.

Case BriefsHigh Courts

Rajasthan High Court: A Division Bench of Akil Kumar, CJ and Sameer Kureshi, J. allowed the writ petition and set aside the proceedings issued by show cause notice and subsequent demands confirmed by OIO. 

The case of the petitioner is that he is a Customs House Agent and the co-petitioners were importers engaged in the import of Glass Chatons at Customs ports at Jaipur. One investigation was conducted by Additional Director, DRI (Zonal) Unit Ahmedabad, in connected matter by DRI, Jaipur who after the investigation demanded custom duty under Section 28 of the Act of 1962 and proposed confiscation of the seized goods and imposition of penalty under Section 124, 112, 114A of the Act, 1962. The show cause notice was issued as back as dated 06.08.2014 and in connected matter in 2019. By way of present petitions, the show cause notice (SCN) issued by officers of Directorate of Revenue Intelligence (DRI) under Sections 28 and 124 of the Customs Act, 1962 (in short, ‘Act’ of 1962), are challenged.

Counsel for petitioner submitted that the DRI Officers are not proper officers and show cause notice issued by them are ab initio void, illegal and lacks jurisdiction.

Counsel for respondents submitted that a number of writ petitions were filed before various High Courts for quashing of show cause notices issued by DRI Officers in which directions have been given to first approach Adjudicating Authority to decide the issue of jurisdiction.

The Court in the judgment titled M/s Canon India Private Ltd. v. Commissioner of Customs, AIR 2021 SC 1699 observed

  1. From a conjoint reading of Sections 2(34) and 28 of the Act, it is manifest that only such a Customs Officer who has been assigned the specific functions of assessment and reassessment of duty in the jurisdictional area where the import concerned has been affected, by either the Board or the Commissioner of Customs, in terms of Section 2(34) of the Act is competent to issue notice under section 28 of the Act. Any other reading of Section 28 would render the provisions of Section 2(34) of the Act otiose inasmuch as the test contemplated under Section 2(34) of the Act is that of specific conferment of such functions.”

The court thus observed that On perusal of judgment referred above and relying on provisions of Section 2(34) which defines “proper officer”, Section 6 which defines “functions and powers of custom officer” and Section 28 which refers to “procedure of demand and recovery by the proper officer” having jurisdiction to issue show cause notice and to carry out adjudication, we hold that the entire proceedings initiated by officers of DRI in as much as by issuance of show cause notice under Section 28/124 of the Customs Act lacks jurisdiction and are without any authority of law because the present show cause notice is not issued by custom officer but by DRI officer who has not been assigned specific function/power under Section 6 to issue show cause notice U/S 28 of the Act of 1962. DRI officer is not Competent Authority to issue show cause notice and adjudicate the same as “proper officer”. The Act, the notification relied upon do not define and bring the DRI officers within four corners of “proper officers” having functions and powers to act under Section 28 of the Act of 1962.

The Court held “The proceedings issued by show cause notice and subsequent demands confirmed by OIO are set aside, as prayed in the writ petitions.”

[Fairdeal Shipping Agency Pvt Ltd v. Joint Commissioner of Customs (Preventive), Jaipur; 2022 SCC OnLine Raj 411; decided on 09-02-2022]


For Petitioner(s): Mr. Arun Goyal

For Respondent(s): Mr. Kinshuk Jain

Arunima Bose, Editorial Assistant has reported this brief.

Case BriefsHigh Courts

Delhi High Court: Yashwant Varma, J., held that once a document comes to be duly registered, it becomes a fait accompli.

In the present matter, the petitioner challenged the validity of a show-cause notice issued by the District Magistrate, the second respondent.

The said notice calls upon the petitioner to show cause why sale deeds executed and duly registered be not cancelled on the allegation that the instruments came to be registered by concealment of material facts.

The principal question which falls for determination would be:

 Whether jurisdiction can be recognized to have the jurisdiction or authority to issue the notice impugned?

The allegation of concealment of facts rested upon the competence of M/s G.D Rathi Steels to have conveyed the property in favour of the present petitioners. Petitioners referred to the litigation which ensued between their vendor and DDA and to certain orders passed by the Supreme Court in M.C. Mehta v. Union of India, (1996) 4 SCC 351 and more particularly the order of 10 May 1996 passed in I.A. No. 22.

Petitioners submitted that their vendor derived title to the property pursuant to the orders passed in execution proceedings and the order passed therein. The sale deed in favour of the petitioner came to be executed by M/s G.D. Rathi Steels Ltd. and was duly recorded by the sub-registrar concerned and accorded Registration number. It was only after the above-said instrument had been duly registered that the impugned show cause notice came to be issued.

Analysis, Law and Decision

High Court noted that the Registration Act, 1908 conferred no authority or power upon the District Magistrate to initiate proceedings for cancellation of an instrument which had come to be duly registered.

Further, it was significantly noted that the show cause notice impugned here had not even been shown to have been penned by the District Magistrate. The notice was also not expressed to have been issued pursuant to an order made by the District Magistrate or for and on behalf of the competent authority.

The notice was merely endorsed by a Reader stated to be attached to his office.

Bench stated that the respondents miserably failed to establish any jurisdiction or authority vesting in the District Magistrate to seek cancellation of a document that came to be registered in terms of the provisions of Registration Act, 1908.

The provisions of the Registration Act do not contemplate the registering authority delving into questions of the capacity or entitlement of parties to effect a transaction in relation to the subject matter of the instrument. Also, the Act does not empower the registering authority to undertake an enquiry with respect to the legal validity of the contract which may form the subject matter of the instrument presented for registration.

Function of the registering authority is clearly administrative. The said aspect was duly explained by the Supreme Court in the Satya Pal Anand v. State of Madhya Pradesh, (2016) 10 SCC 767.

The above-cited decision clearly answered the questions raised in favour of the petitioner. The said decision also makes it clear that the appellate power conferred by virtue of Section 72 of the Act also cannot be invoked for the purposes of cancelling a document that had come to be registered.

“…once a document comes to be duly registered, it becomes a fait accompli.”

 What can be done, if one wants to cancel the registration of a document?

The only remedy available to an aggrieved person is to institute appropriate proceedings before a competent curt for cancellation or annulment of the instrument. The Bench also expressed that no provision is made in the Act that can be recognized as conferring authority upon the respondents to cancel a registered instrument.

In view of the above discussion, no writ petition was allowed and the impugned show cause notice shall stand quashed. [Gunmala Jain v. GNCT of Delhi, 2021 SCC OnLine Del 5484, decided on 15-12-2021]

Advocates before the Court:

For the Petitioner: Abhinav Kaushik, Advocate

For the Respondents: Santosh Kumar Tripathi, SC (C), GNCTD with Arun Panwar and Vrinda Singh, Advocates.

Jharkhand High Court
Case BriefsHigh Courts

Jharkhand High Court: A Division Bench of Aparesh Kumar Singh and Anubha Rawat Choudhary, JJ., allowed the petition and directed the respondents to initiate fresh proceedings from the same stage in accordance with law.

The present petition was filed challenging the show-cause notice under Section 74 of the JGST Act, 2017 dated 7-06-2021 for the tax period July 2020 -September 2020 issued by the Deputy Commissioner of State Taxes (respondent 3) along with the summary of show-cause notice issued in exercise of power under Rule 142(1)(a) of the Jharkhand Goods and Services Tax Rules, 2017 on the ground being vague, without jurisidiction and void ab initio.

Counsel for the petitioner submitted that the impugned show-cause notice is vague and does not disclose the offence and a contravention as it is a mere mechanical reproduction of the provisions of Section 74 without striking of the irrelevant portions. It is thus incapable of any reply and does not fulfill the ingredients of a notice in the eyes of law. Petitioner would be denied the opportunity to properly defend itself. It is, therefore, in violation of the principles of natural justice. It was further is submitted that what is not alleged in the show-cause notice under Section 74 cannot be part of such summary of show-cause notice. As per Section 73(1)/74(1) the requirement is of ‘notice’ and not ‘knowledge’. Section 75(7) of the Act contemplates that no demand shall be confirmed on grounds other than the grounds specified in the notice.

Counsel for respondents submitted that the petitioner has an efficacious alternative remedy of appeal after the proceeding is concluded and the order in original is passed. He also reiterated the well recognized exceptions to the invocation of writ jurisdiction in the presence of an alternative remedy. It is further submitted that a notice ought not to be struck down, even if strictly not in the format, but if it contains in substance of the matter which a notice must contain.

A bare perusal of Section 74(1) of the JGST Act, 2017A indicates that in a case where it appears to a proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilized by reason of fraud or any willful misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax, which has not been paid or has been short paid or to whom refund has been erroneously made or who has wrongly availed or utilized input tax credit requiring him to show cause as to why he should not pay the amount specified in the notice along with the interest payable thereupon under Section 50 and a penalty equivalent to the tax specified in the notice. “

In contradistinction to the provision under Section 73 of the Act under the same Chapter-XIV relating to ‘Demands and Recovery’, the ingredients of Section 74 of the Act require either of the following ingredients to be satisfied for proceeding there under i.e. that the tax in question has not been paid or short paid or erroneously refunded or the ITC has been wrongly availed or utilized by reason of fraud or any willful misstatement or suppression of facts to evade tax.”

The Court observed that a bare perusal of the impugned show-case notice creates a clear impression that it is a notice issued in a format without even striking out any irrelevant portions and without stating the contraventions committed by the petitioner i.e. whether its actuated by reason of fraud or any willful misstatement or suppression of facts in order to evade tax. Needless to say that the proceedings under Section 74 have a serious connotation as they allege punitive consequences on account of fraud or any willful misstatement or suppression of facts employed by the person chargeable with tax. In absence of clear charges which the person so alleged is required to answer; the noticee is bound to be denied proper opportunity to defend itself. This would entail violation of principles of natural justice which is a well-recognized exception for invocation of writ jurisdiction despite availability of alternative remedy.

The Court thus held “…the impugned notice completely lacks in fulfilling the ingredients of a proper show-cause notice under Section 74 of the Act. Proceedings under Section 74 of the Act have to be preceded by a proper show-cause notice. A summary of show-cause notice as issued in Form GST DRC-01 in terms of Rule 142(1) of the JGST Rules, 2017…” 

The Court further held “…the impugned show-cause notice as contained in Annexure-1 does not fulfill the ingredients of a proper show-cause notice and thus amounts to violation of principles of natural justice, the challenge is entertainable in exercise of writ jurisdiction of this Court. Accordingly, the impugned notice at Annexure-1 and the summary of show-cause notice at Annexure-2 in Form GSTDRC-01 are quashed.”

[Nkas Services Pvt. Ltd. v. State of Jharkhand, WP (T) No.2444 of 2021, decided on 08-10-2021]

Arunima Bose, Editorial Assistant has reported this brief.


For the Petitioner: Adv. Kartik Kurmy and Nitin Kr. Pasari Sidhi Jalan

For the State: Adv. Salona Mittal

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India- Ananta Barua, Whole Time Member, while agreeing with the Enquiry Report, restrained SIC Stocks and Services Pvt. Ltd. from accepting new clients for a period of three months and further warned Sidharth Handa and Gita Handa to ensure that all their future dealings in the securities market should be done strictly in accordance with law. Though the proceedings against Col. Rajinder Handa stood abated

In the pertinent case after the Enquiry Report in the show cause notice it was alleged that the Noticees had created false and artificial market in shares of Vertex Group Ltd. (VSL) during the investigation period by executing synchronised trades, self-trades, cross dealings as a stock broker for promoters/ directors and connected entities of VSL resulting in inflation of the price and volume of VSL and further made third party transfers of client funds, thereby indulging in fraudulent trade practices. It was further alleged that the Noticees failed to exercise due skill, care and diligence expected from stock-brokers. While in reply to the show cause notice (after many recalling attempts) the Noticees denied any such advice given to the clients and further submitted that there was an inordinate delay in initiation of the proceedings and the SCN has been issued after more than 8 years from the alleged violation and investigation. While it contended that any action at this stage would amount to ‘triple jeopardy’ amounting to judicial insubordination.

While agreeing to the Enquiry report and rejecting the submissions of the Noticees, considering the total penalty of Rs. 26,00,000 levied by the adjudicating authority appointed by SEBI, on the Noticees for the impugned transactions,  the Tribunal restrained SIC Stocks and Services Pvt. Ltd. from accepting new clients for a period of three months and further warned Sidharth Handa and Gita Handa to ensure that all their future dealings in the securities market should be done strictly in accordance with law. Though the proceedings against Col. Rajinder Handa stood abated.[Vertex Spinning Ltd., In re, WTM/AB/EFD1/DRA4/20/2021-22, decided on 21-09-2021]

Agatha Shukla, Editorial Assistant has reported this brief.

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Appellate Tribunal, Mumbai (SAT): The Coram of Justice Tarun Agarwala, (Presiding Officer) and Justice M.T. Joshi (Judicial Member), while dismissing the appeals at the admission stage on not finding any merit, was of the opinion that, there was an application of mind on the basis of which the opinion was so formed to proceed with the inquiry under Rule 4(3) of the Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties) Rules, 1995.

In the present matter, the impugned order of SEBI was challenged stating that SEBI had already formed an opinion prior to the filing of the reply given by the appellants. Therefore, it was contended that before forming an opinion the appellants should have been heard and by not giving an opportunity of hearing the impugned order is erroneous and violative of the principles of natural justice.

Therefore the issues were,

  1. Whether the opinion formed by the adjudicating authority to initiate an inquiry, is an order that is appealable under Section 15T of the SEBI Act.
  2. Whether any opportunity of hearing was required to be given before forming an opinion under Rule 4(3) of the Rules of 1995.

The Coram answering in favour of the Respondent referred to Natwar Singh v. Director of Enforcement, (2010) 13 SCC 255, and quoted the Supreme Court in the order, which stated, 

“…a reasonable opportunity of being heard is to be provided by the adjudicating authority in the manner prescribed for the purpose of imposing any penalty as provided for in the Act and not at the stage where the adjudicating authority is required merely to decide as to whether an inquiry at all be held into the matter. Further, the Court opined, Imposing of penalty after the adjudication is fraught with grave and serious consequences and therefore, the requirement of providing a reasonable opportunity of being heard before imposition of any such penalty is to be met. In contradistinction, the opinion formed by the adjudicating authority whether an inquiry should be held into the allegations made in the complaint are not fraught with such grave consequences and therefore the minimum requirement of a show-cause notice and consideration of cause shown would meet the ends of justice.

While clearing further Chandrakant Amratlal Parekh v. AO, SEBI in Appeal No. 91 of 2007 decided on October 23, 2007, referred to by the Counsel for the Respondent to differentiate between an interlocutory order and an adjudicating order, cleared the possibility since the impugned order was not an order rather an opinion.

The Coram opined,

“This Tribunal held that formation of an opinion is an interlocutory order which is not appealable under Section 15T of the SEBI Act. We beg to differ as in our view the opinion formed is not an order”.

[A.T. Rajan v. SEBI, Misc. Application No. 921 of 2021, decided on 30-08-2021]

Counsel for the Parties:

Mr Ashim Sood, Advocate with Ms Shreya Suri, Ms Vaishnavi Rao, Ms Swati Mittal, Mr Rhythm Buaria, Advocates for the Appellants.

Mr Gaurav Joshi, Senior Advocate with Mr Abhiraj Arora, Ms Rashi Dalmia, Mr Karthik Narayan, Advocates i/b ELP for the Respondent.

Agatha Shukla, Editorial Assistant has reported this brief.

Case BriefsHigh Courts

Delhi High Court: The Division Bench of Manmohan and Navin Chawla, JJ., noted the mandatory condition provided under Section 144B (7) of Income Tax Act, 1961.

Present petition challenged the Assessment order, notice of demand and notice of penalty passed under Section 143(3) read with Section 144B, Section 156 and Section 274 read with Section 271AAC(1) of the Income Tax Act, 1961 pertaining to the Assessment Year 2018-19.

Petitioner’s counsel submitted that there had been a breach of principles of natural justice, inasmuch as the respondent/revenue had failed to issue the mandatory Show Cause Notice-cum-draft assessment order to the petitioner/assessee, prior to the passing of the impugned assessment order.

Counsel for the Respondent-Revenue submitted that the final Assessment order had been passed without the issuance of a formal Show Cause Notice due to program and systematic glitches and he pointed out that the petitioner had been given ample opportunities and time for furnishing the requisite details and making submissions and hence there was no violation of principles of natural justice.

Analysis, Law and Decision

High Court opined that Section 144B (7) of the Income Tax Act, 1961 mandatorily provides for issuance of a prior show cause notice and draft assessment order before issuing the final assessment order.

Since in the present matter no prior Show Cause Notice, as well as assessment order, had been issued before passing the impugned assessment order, there was a blatant violation of principles of natural justice as well as the mandatory procedure prescribed in “Faceless Assessment Scheme” and as stipulated in Section 144 B of the Act.

Therefore, in the aforesaid facts, impugned assessment order, notice of demand and notice of penalty were set aside and the matter was remanded back to the Assessing Officer, who shall issue a draft assessment order and thereafter pass a reasoned order.

In view of the above, petition was disposed of. [Akashganga Infraventures India Ltd. v. National Faceless Assessment Centre, Delhi; WP (C) 5413 of 2021, decided on 4-08-2021]

Advocates before the Court: 

For the Petitioner: Mr Prakash Kumar, Advocate & Ms Rashmi Singh, Advocates

For the Respondent: Mr Zoheb Hossain, Sr. Standing Counsel for the Department

Case BriefsTribunals/Commissions/Regulatory Bodies

Customs, Excise and Services Tax Appellate Tribunal (CESTAT): Anil Choudhary (Judicial Member) allowed an appeal in which the issue before the Tribunal was that whether the show cause notice was validly served on the appellant which is a condition precedent for giving jurisdiction to the Adjudicating Authority to pass an order.

Appellant was neither an importer nor engaged in the business of import and export. Further, he does not have any Import Export Code (IEC). The Revenue had seized post parcels imported from China not bearing the name of consignor, at foreign post office, New Delhi. The parcels were examined by the officers of DRI under panchnama. Summons were issued in the name of the appellant dated 11-02-2016, 02-03-2016 and 15-03-2016. Thereafter, nobody appeared before the DRI. An officer personally visited the premises at D-164, Punjabi Basti, Baljeet Nagar, New Delhi-110008, but the person – Shri Baljeet Singh was not found. Thereafter, without ascertaining or identifying the main person – Shri Baljeet Singh, show cause notice dated 20-07-2016 was issued by speed post and also marked to notice board of DRI.

Counsel for the appellant, Mr. Akhil Krishan Maggu submitted that neither the aforementioned show-cause notice nor any communication like summons or notice, nothing was served on him thus the ex-parte was wholly without jurisdiction and a nullity.

Authorised Representative for the Revenue, Mr. Pradeep Gupta submitted that the address given by the appellant in the memo of appeal was same on which the show cause notice etc. was issued through speed post, and accordingly stated that there was sufficient service of show cause notice.

The Tribunal noticed that inspite of opportunity given, Revenue failed to produce the proof of delivery of the show cause notice and from the perusal of records it was observed that Adjudicating Authority had not recorded satisfaction of service of show cause notice and have proceeded to pass the ex-parte order-in-original, which is held to be a nullity in the eyes of law.

The Tribunal while allowing the appeal held that for passing a valid adjudication order, valid service of show cause notice is essential.[Baldeep Singh v. Commr. of Customs, 2021 SCC OnLine CESTAT 176, decided on 07-04-2021]

Suchita Shukla, Editorial Assistant has reported this brief.

Hot Off The PressNews

NHRC, India issued a notice on 24-02-2021 to the Union Ministry of Defence, through its Secretary, to show cause why Rs 5 Lakh should not be recommended to be paid as a relief to the next of the kin of an innocent citizen Thingtu Ngemu, who died in the uninformed and indiscriminate firing by the Army unit of 21 Para Special Forces, PSF, during an operation against Naxalites in Nantok circle, Dist. Changlang, Arunachal Pradesh in the interning period of 14-15 June, 2017.

The Commission has communicated that the case needs to be treated as special because the Judicial Enquiry Magistrate has held that the PSF personnel are responsible for the death of an innocent citizen. The Commission has also emphasized that if the Defence Ministry pays the relief amount to the victim’s family on the basis of its show cause notice in such cases, it will send positive signals amongst the locals and the credibility of the Armed Forces shall also improve. The response is expected within four weeks.

The Commission had registered the case on 29th June, 2017, on the basis of intimation from the Supdt. of Police, Changland, Arunachal Pradesh regarding the death of Thingtu Ngemu during an action by the security forces against naxalites in Nantok circle District Changlang.

Subsequently, the Commission through its Investigation Division found that the Judicial Magistrate, First Class, Distt. Changlang, had conducted the enquiry in the matter. It is recorded, in his report that the PSF personnel neither cooperated nor submitted any statements regarding the operation despite official letters & request of the Enquiry Magistrate.

After considering the relevant evidences, the Judicial enquiry officer found that the Army Unit of 21 Para Special Forces (PSF) of Jorhat had laid ambush within the reachable range of civilian/villagers, without any knowledge of local civil police or villagers, which was undesirable and dangerous for the inhabitants. Further, the PSF personnel detained a local innocent villager Tuwang Ngemu till late night without any reason, while he was returning from his own garden. He should have been allowed to go home after ascertaining his identity.

As a result, the other villagers and family members came towards the forest in search of Tuwang Ngemu. The PSF should have used night vision glasses/equipment to see through the dark night hours and should have identified innocent empty-handed villagers. They should have also heard the shouts of the villagers, who were searching their man, who was already detained by the PSF. Instead they resorted to blind firing without any provocation, which led to the killing of an innocent villager under the pretext of “mistaken identity”.

The enquiry Magistrate has also reported that the PSF continued firing indiscriminately from one side till 3 am of the next morning of 15/6/2017 without any retaliation or any cross-firing from anywhere. Such a blunder and irresponsible action is unjustified.

Holding the PSF personnel responsible for the death of Thingtu Ngemu, the enquiry magistrate noted that the victim was an innocent and had no connection with any outfit. The deceased is survived by his old ailing parents, wife & two small children. He was the primary bread earner & now the family has no source of livelihood.

Based on the analysis and inputs of the facts by its Investigation Division, the Commission, under Section 19 of PHR Act, has issued the show cause notice why the victim’s family should not be paid the monetary relief.


[Press Release dt. 26-02-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

Insolvency and Bankruptcy Board of India (IBBI): Dr Mukulita Vijayawargiya (Whole Time Member, IBBI) disposed of a show-cause notice issued to a Professional Member of ICSI Member Institute of Insolvency Professionals (IPA) and IP registered with the Insolvency and Bankruptcy Board of India (IBBI).

IBBI had issued the show cause notice for accepting the assignment as the Interim Resolution Professional in the Corporate Insolvency Resolution Process of Coastal Energy Private Limited without holding a valid Authorisation for Assignment.

Response to the Show Cause Notice was referred to the Disciplinary Committee for disposal of the SCN in accordance with the Code and Regulations made thereunder. The IP availed an opportunity of personal hearing before the DC on 10-09-2020.

Show Cause Notice

Show Cause Notice issued by IBBI alleged contravention of Sections 208(2)(a) and 208(2)(e) of the Insolvency and Bankruptcy Code, 2016, regulations 7(2)(a), 7(2)(h) and 7A of the IBBI Regulations, 2016 read with clauses 1, 2, 11, 12 and 14 of the Code of Conduct contained in the First Schedule of the IP Regulations for accepting the assignment of the Insolvency Resolution Professional in CIRP of Coastal Energy Private Limited after 31-12-2019 for which the public announcement was made on 08-01-2020 without holding a valid AFA from the IPA.

Analysis and Findings

Disciplinary Committee noted that the provisions of the Code and regulations are spelt in plain and unambiguous language.

Regulation 7A of IP Regulations requires for any IP to have AFA before undertaking any assignment after 31-12-2019.

One of the essential conditions for undertaking any assignment by an IP is that he should have a valid Authorisation for Assignment which is issued by the IPA with which he is enrolled.

“Without AFA, an IP is not eligible to undertake assignments or conduct various processes thereof.”

Section 208 of the Code casts an obligation to abide by the code of conduct and comply with all requirements and terms and conditions specified in the bye-laws of the insolvency professional agency of which he is a member.

Certificate of Registration

DC added to its observations that the certificate of registration granted to an IP is subject to the condition that he should follow at all times the provisions of the Code and Regulations and the bye-laws of Insolvency Professional Agency of which the IP is a member and also follow the Code of Conduct specified in the First Schedule to the IP Regulations.

Section 208(2) of the Code provides that every IP shall take reasonable care and diligence while performing his duties and to perform his functions in such manner and subject to such conditions as may be specified.

Code of Conduct specified in the First Schedule of the IP regulations enumerates a list of code of conduct for insolvency professionals including maintaining of integrity and professional competence for rendering professional service, representation of correct facts and correcting misapprehension, not to conceal material information and not to act with mala fide or with negligence.

In the instant matter, it was observed that an insolvency professional shall not accept or undertake an assignment after 31-12-2019 unless he holds a valid AFA.

An order against S. Rajagopal was passed by the DC on 07-09-2020 for accepting the assignment as IRP after 31-12-2019 without holding a valid AFA in the matter of Coastal Energy (P) Ltd. and warned him to be extremely careful, diligent, strictly act as per law and similar action should not be repeated.

Concluding the present matter, it was observed that since ICSI Institue of Insolvency Professionals has already taken disciplinary action against S. Rajagopal, for accepting an assignment as IRP after 31-12-2019 without holding a valid AFA, show cause notice disposes of the SCN without any direction against S. Rajagopal. [S. Rajagopal, In Re., Insolvency Professional (IP) under Regulation 11 of the Insolvency and Bankruptcy Board of India (Insolvency Professional) Regulations, 2016; No. IBBI/DC/43/2020, decided on 13-11-2020]

Read More:

Regulation 7A reads as follows:

“7A. An insolvency professional shall not accept or undertake an assignment after 31st December, 2019 unless he holds a valid authorisation for assignment on the date of such acceptance or commencement of such assignment, as the case may be:

Provided that provisions of this regulation shall not apply to an assignment which an insolvency professional is undertaking as on-
(a) 31st December, 2019; or
(b) the date of expiry of his authorisation for assignment.”

Case BriefsSupreme Court

Supreme Court: The bench of SA Nazeer* and BR Gavai, JJ has held that a show cause notice constituting the basis of a blacklisting order must spell out clearly the intention on the part of the issuer of the notice to blacklist the noticee. Such a clear notice is essential for ensuring that the person against whom the penalty of blacklisting is intended to be imposed, has an adequate, informed and meaningful opportunity to show cause against his possible blacklisting.

Background of the Case

In the present case, the Food Corporation of India blacklisted UMC Technologies Private Limited, the appellant, from participating in any future tenders of the Corporation for a period of 5 years. The appellant was declared as the successful bidder in the bids invited by the Corporation for appointment of a recruitment agency to conduct the process of recruitment for hiring watchmen for the Corporation’s office. However, on the day when the appellant conducted a written exam for eligible aspirants for the post of watchman with the Corporation at various centres in Madhya Pradesh, a Special Task Force of Bhopal Police arrested 50 persons in Gwalior, who were in possession of certain handwritten documents which prima facie appeared to be the question papers related to the examination conducted by the appellant.

Upon receipt of the above information, the Corporation issued a show cause notice dated 10.04.2018 alleging that the appellant had breached various clauses of the Bid Document on the ground that it was the sole responsibility of the appellant to prepare and distribute the question papers as well as conduct the examination in a highly confidential manner. The said notice directed the appellant to furnish an explanation within 15 days, failing which an appropriate ex-parte decision would be taken by the Corporation.

The appellant replied to the aforesaid notice and submitted an Observation Report-cum-Reply/Explanation which compared the seized documents with the original question papers and contended that there were many dissimilarities between the two and thus there had been no leakage or dissemination of the original question papers.


Principles of Natural Justice

It is the first principle of civilised jurisprudence that a person against whom any action is sought to be taken or whose right or interests are being affected should be given a reasonable opportunity to defend himself. Hence, before adjudication starts, the authority concerned should give to the affected party a notice of the case against him so that he can defend himself. Such notice should be adequate and the grounds necessitating action and the penalty/action proposed should be mentioned specifically and unambiguously.

“An order travelling beyond the bounds of notice is impermissible and without jurisdiction to that extent.”

Show Cause Notice in case of Blacklisting

In the context of blacklisting of a person or an entity by the state or a state corporation, the requirement of a valid, particularized and unambiguous show cause notice is particularly crucial due to the severe consequences of blacklisting and the stigmatization that accrues to the person/entity being blacklisted.

Blacklisting has the effect of denying a person or an entity the privileged opportunity of entering into government contracts. This privilege arises because it is the State who is the counterparty in government contracts and as such, every eligible person is to be afforded an equal opportunity to participate in such contracts, without arbitrariness and discrimination.

“Not only does blacklisting takes away this privilege, it also tarnishes the blacklisted person’s reputation and brings the person’s character into question. Blacklisting also has long-lasting civil consequences for the future business prospects of the blacklisted person.”

Validity of the Show Cause Notice in the case at hand

The action of blacklisting in the present case was neither expressly proposed nor could it have been inferred from the language employed by the Corporation in its show cause notice. The notice merely contained a vague statement that in light of the alleged leakage of question papers by the appellant, an appropriate decision will be taken by the Corporation.

“While the notice clarified that the 12 clauses specified in the notice were only indicative and not exhaustive, there was nothing in the notice which could have given the appellant the impression that the action of blacklisting was being proposed. This is especially true since the appellant was under the belief that the Corporation was not even empowered to take such an action against it and since the only clause which mentioned blacklisting was not referred to by the Corporation in its show cause notice.”

It was the case of the appellant that serious prejudice has been caused to it due to the Corporation’s order of blacklisting as several other government corporations have now terminated their contracts with the appellant and/or prevented the appellant from participating in future tenders even though the impugned blacklisting order was, in fact, limited to the Corporation’s Madhya Pradesh regional office.

On this the Court said,

“This domino effect, which can effectively lead to the civil death of a person, shows that the consequences of blacklisting travel far beyond the dealings of the blacklisted person with one particular government corporation and in view thereof, this Court has consistently prescribed strict adherence to principles of natural justice whenever an entity is sought to be blacklisted.”

The Court, hence, noticed that it was incumbent on the part of the Corporation to clarify in the show cause notice that it intended to blacklist the appellant, so as to provide adequate and meaningful opportunity to the appellant to show cause against the same.


“The mere existence of a clause in the Bid Document, which mentions blacklisting as a bar against eligibility, cannot satisfy the mandatory requirement of a clear mention of the proposed action in the show cause notice.”

The Court observed that the Corporation’s notice is completely silent about blacklisting and as such, it could not have led the appellant to infer that such an action could be taken by the Corporation in pursuance of this notice. Had the Corporation expressed its mind in the show cause notice to black list, the appellant could have filed a suitable reply for the same.

Therefore, it was held that the show cause notice dated 10.04.2018 did not fulfil the requirements of a valid show cause notice for blacklisting and as the order of blacklisting the appellant clearly traversed beyond the bounds of the show cause notice which is impermissible in law, the consequent blacklisting order dated 09.01.2019 cannot be sustained.

[UMC Technologies Ltd. v. Food Corporation of India,  2020 SCC OnLine SC 934, decided on 16.11.2020]

*Justice SA Nazeer has penned this judgment

Case BriefsHigh Courts

Rajasthan High Court: Sanjeev Prakash Sharma, J., dismissed a petition which was filed praying to quash and set aside the certificate of the test or analyze the Government Analyst under Section 25(1) of the Drugs and Cosmetic Act, 1940 on the ground that the Drug samples which were tested were highly belated. It was prayed that no coercive action should be taken against the petitioner-company.

The court found that after the result of the laboratory was conveyed to the petitioner, show cause notice had been given to the petitioner by the Office of Drug Control Officer, Bharatpur, Rajasthan. The petitioner’s matter is pending before the Disciplinary Committee. The counsel for the petitioner, M.M. Ranjan, Senior Advocate with Tarun Kumar Mishra, however, submitted that in view of the judgment passed by the Supreme Court in Medipol Pharmaceutical India (P) Ltd. v. Post Graduate Institute of Medical Education & Research, Civil Appeal No. 2903 of 2020 this court ought to interfere at this stage and restrain the respondents from taking any decision on the said report as the same has highly been belated and the sample has been tested after a period of 23 months. They further submitted that the samples which were tested were not properly placed and the analyst report was defective and cannot be acted upon.

The Court keeping in mind observations of the Supreme Court in the above decision refrained from examining the analyst report and laboratory test report and gave its own conclusions relating to it. The Court found that no final decision had been taken by the respondent till this date and thus the petition is pre-mature.

The Court while dismissing the appeal quoted from the Supreme Court judgment in Union of India v. Coastal Container Transporters Assn., 2019 SCC OnLine SC 274, where the Court had held,

“On the other hand, we find force in the contention of the learned senior Counsel, Sri Radha Krishnan, appearing for the Appellants that the High Court has committed error in entertaining the writ petition Under Article 226 of Constitution of India at the stage of show cause notices. Though there is no bar as such for entertaining the writ petitions at the stage of show cause notice, but it is settled by number of decisions of this Court, where writ petitions can be entertained at the show cause notice stage. Neither it is a case of lack of jurisdiction nor any violation of principles of natural justice is alleged so as to entertain the writ petition at the stage of notice. High Court ought not to have entertained the writ petition, more so, when against the final orders appeal lies to this Court. The judgment of this Court in the case of Union of India and Anr. v. Guwahati Carbon Ltd. (supra) relied on by the learned senior Counsel for the Appellants also supports their case. In the aforesaid judgment, arising out of Central Excise Act, 1944, this Court has held that excise law is a complete code in order to seek redress in excise matters and held that entertaining writ petition is not proper where alternative remedy under statute is available. When there is a serious dispute with regard to classification of service, the Respondents ought to have responded to the show cause notices by placing material in support of their stand but at the same time, there is no reason to approach the High Court questioning the very show cause notices. Further, as held by the High Court, it cannot be said that even from the contents of show cause notices there are no factual disputes. Further, the judgment of this Court in the case of Malladi Drugs & Pharma Ltd. v. Union of India, relied on by the learned senior Counsel for the Appellants also supports their case where this Court has upheld the judgment of the High Court which refused to interfere at show cause notice stage.”[Vivek Pharmachem (India) Ltd. v. State of Rajasthan,  2020 SCC OnLine Raj 1465, decided on 13-10-2020]

Suchita Shukla, Editorial Assistant has put this story together

Case BriefsHigh Courts

Allahabad High Court: Disgruntled with the respondent for non-compliance with the Court’s earlier orders, Vivek Kumar Birla, J. allowed the present contempt application and issued a show-cause notice to the concerned delinquent officers.

The present contempt application has been filed by the applicant pleading for an action against the respondent for wilful disobedience of the judgment and order dated 18-09-2018 passed by this Court in Special Appeal Defective No. 656 of 2018 and the order dated 17-09-2019 passed in Contempt Application (Civil) No. 5773 of 2019

Counsel for the applicant, Kushmondeya Shahi has submitted that the copy of the order had been served to the respondent and yet nothing was done in that regard. Left with no other option, the applicant filed the present application seeking relief. The respondent had been granted more time for compliance vide order dated 17-09-2019 but even after the expiry of the period, any decision is yet to be taken by the respondents.

Upon careful perusal of the facts and circumstances, the Court has found it fit to initiate contempt proceedings against the respondent.

Lamenting over the sorry state of affairs with respect to the compliance of its orders, the Court has passed strict remarks taking the concerned administrative officers to the task. The remarks have been reproduced below for reference:

“This Court is noticing every day that apparently the officers concerned, who were directed to act as per the order of the Court, are not complying with the orders at the first instance and the aggrieved party is forced to file contempt application and even after granting further time to comply with the order of the writ Court passed in contempt application, the orders not being complied with. Apparently, the Officers are becoming habitual and not complying with the orders of this Court at the first instance.

This is a sorry state of affairs and it is expected that the opposite party shall make every effort and shall also issue necessary orders in this regard to the subordinate authorities to strictly comply with the orders at the first instance itself, otherwise the Court will take a serious view of the matter.”

 In view of the above, the Court has allowed the present contempt application issuing notice to the respondent to appear in person and show cause as to why charges be not framed against him under Section 12 of the Contempt of Courts Act for wilful disobedience of the aforementioned orders. [Arun Kumar v. Renuka Kumar, Contempt Application (Civil) No. 3033 of 2020, decided on 08-09-2020]

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Case BriefsHigh Courts

Customs, Excise and Services Tax Appellate Tribunal (CESTAT): A Division Bench of Anil Choudhary (Judicial Member) and P. Venkata Subba Rao (Technical Member), allowed an appeal which was filed on being aggrieved by the dismissal of the appeal by the Commissioner (Appeals).

The appellant is registered with the Service Tax Department and was engaged in the business of civil construction classifiable under ‘Works Contract Services’. During verification of the records and accounts maintained by the appellant and on reconciliation with the ST-3 returns filed by the appellant, it appeared that the appellant had not paid service tax on some part of their turnover during the period 2011-12 to 2014-15 particularly in respect of service provided to organizations like Andhra Pradesh Power Generation Corporation (AP GENCO), Andhra Pradesh Tourism Development Corporation (APTDC), etc. It further appeared that in respect of service rendered the recipient(s) did not fall under the category of Government/ local authority/ Government authority. The show-cause notice was adjudicated on the contest and the aforementioned demands were confirmed along with penalty of Rs 1,03,83,141/- under Section 78 of the Act and a further penalty of Rs 10,000/ under Section 77(2) of the Finance Act, 1994. Aggrieved by which the appellant had filed an appeal with the Commissioner (Appeals) who had dismissed the appeal but had reduced the penalty. Thus, the instant appeal was filed.

The Tribunal while allowing the appeal explained that admittedly all the companies / Corporations have been established by the Government of Andhra Pradesh under the various Acts and /or ‘Government order’, as aforementioned and thus held that the appellant had provided service to Governmental authority. Thus, the service recipients were covered under sub-clause (i) of clause (5), of the definition of the term ‘Govt. Authority’, in Notification No. 25/2012-ST, as amended by Notification No. 2/2014-ST (by way of substitution). Accordingly, the appellant is entitled to exemption and the demand of Rs 97,63,710 is set aside. Further, in the second issue, it was found that the construction of flats under the ‘development agreement’ with the landowner by the appellant is on principal to principal basis. In such a transaction, there is neither any element of service provided to the landowner, nor any element of sale, thus, the Tribunal held that the service tax was not imposable setting aside the demand of Rs 5,55,458/-. Lastly, in the third issue, the Tribunal held that the appellant had already provided the service as well as raised the invoice before the due date. Further, admittedly appellant had not given the option for payment of tax as per the date of receipt of consideration. Thus, the Tribunal held that demand of tax, relying on Rule 11 of Point of Taxation Rules was bad, setting aside the penalty of Rs 63,973. [Krishi Constructions (P) Ltd. v. Commr. of Central Tax, 2020 SCC OnLine CESTAT 199, decided on 22-09-2020]

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Case BriefsHigh Courts

Karnataka High Court: M.I. Arun, J. allowed the writ petition and declared the show cause notice or any subsequent proceeding as null and void.

According to the brief facts of the case, the petitioners were granted the impugned land in 1975 for non-agricultural purposes and had since been in peaceful possession.

The petitioners contended that the respondents had been issuing show-cause notices and had been pursuing proceedings against them since 2016 alleging that the said land was allotted to them, not in accordance with law. The petitioners had been defending themselves since the very inception of the dispute in 2016, and finally filing the present writ petition against the latest notice issued in August 2020. Further, the petitioners also sought the order passed by the respondent Commissioner cancelling their land grant to be quashed as it had been passed while the present appeal was still being adjudicated upon.

The Court held that since the land was granted to the petitioner in the year 1975 and the show cause notice has been issued in 2020, thus a lapse or delay of 45 years is not reasonable or just. The Court further pointed out that Article 112 of the Limitation Act prescribes 30 years limitation period for suits by or on behalf of the central or state government.

Furthermore, fraud may vitiate everything, but the respondents failed in indicating fraudulent acts by the petitioners in the notice. Thus the incessant delay in issuing the notice was held to be bad in law.[G. Chitra Poornima v. State of Karnataka, 2020 SCC OnLine Kar 1393, decided on 10-09-2020]

Case BriefsHigh Courts

Bombay High Court: Anil S. Kilor, J., held that to declare land as private forest under Maharashtra Private Forest (Acquisition) Act, 1975, it is necessary for the land to fall under the ambit of ‘private forest’ under Section 2 (f) and notice has to be issued to the owner and to all other persons having an interest in such land, calling on them to show cause why such declaration should not be made.

Present petition is arising out of the order dated 08-03-2016 passed by Maharashtra Revenue Tribunal, Nagpur upholding the Collector’s Order declaring thereby the notices issued by the Range Forest Officer to the petitioner intimating that the Government has taken possession of the land owned by the petitioner as the land falls under the definition of Section 2(c–i)(f) of the Maharashtra Private Forest (Acquisition) Act, 1975.

Sunil Manohar, Senior Advocate assisted by Vidya Umale, Advocate for the petitioner and Barabde, Assistant Government Pleader for the respondents.

What does Section 3 of the Maharashtra Private Forest (Acquisition) Act, 1975 talk about?

Section 3 of the Act, 1975, speaks about the vesting of private forest in State Government.

It says that all private forests in the State shall stand acquired and vest, free from all encumbrances, in, and shall be deemed to be, with all rights in or over the same or appertaining thereto, the property of the State Government.

Further, it has been stipulated all rights, title and interest of the owner or any person other than Government subsisting in any such forest on the appointed day shall be deemed to have been extinguished.

Private Forest

Section 2 (f) of the Act, 1975, defines the ‘private forest’ means in case whether the State Government and any other persons are jointly interested in the forest, the interest of such person in such forest or sites of dwelling houses constructed in such forest which are considered to be necessary for the convenient enjoyment or use of the forest land appurtenant thereto.

Section 21 of the Act, 1975 mandates the Collector or any officer authorised in this behalf by State Government, to issue a notice to the owner and to all other persons having an interest in such land, calling on them to show cause why such declaration should not be made.

Section 21 makes it clear that a private land not covered by Clause-(f) of Section 2 can be declared as a ‘private forest’ and only those lands which are covered by Clause (f) of Section 2 will vest in the State Government in accordance of Section 3 of the Act, 1975.

Present Matter

On perusal of the notices issued by the Range Forest Officer, it is apparent that the said notices do not refer to any declaration under Section 21 or disclose how the land in question falls in the purview of the definition of ‘private forest’ under Section 2 (f).

Further, neither the Collector nor the Tribunal has noted any declaration under Section 21 of the Act 1975 or discussed any material wherefrom it can safely be said that the land owned by the petitioner falls within the purview of Section 2 (f) of the Act, 1975.


Hence, the Bench declared that without disclosing how the land owned by the petitioner falls within the ambit of definition of ‘private forest’ under the Act 1975 or without following the procedure laid down in the Act, to declare the land in question as ‘private forest’ is illegal.

Adding to the above, Court stated that the Collector and the Tribunal did not go into the issue of applicability of the Act, 1975 to the land owned by the petitioner.

In light of the above, matters need to be remanded to the Collector for fresh consideration by keeping all the contentions of the parties open.

It is further directed that the Collector shall consider the observations made hereinabove relating to provisions of Sections 2 (f) and 21 of the Act, 1975 while deciding the matter afresh.[Gaurakshan Sanstha, Arvi, v. Collector Wardha, 2020 SCC OnLine Bom 908, decided on 08-09-2020]

Gauhati High Court
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Gauhati High Court: Achintya Malla Bujor Barua, J. allowed the writ petition and granted the respondents the liberty to continue proceedings against the petition at their behest by affording him the opportunity to be heard first.

The facts in a nutshell bring out that the petitioner, who is a registered contractor under the PWRD, was allotted work as per the letter of acceptance. Although the original period for completion of the work was 3 months, due to certain intervening factors, the time was extended. The petitioner submitted that the work was completed prior to the end of the extended period. Later on, there was a complaint from the Commissioner & Secretary to the Governor of Assam that the approach road to the Raj Bhawan was damaged. There was an enquiry on the said complaint and it is stated that the PWD had submitted a report that some loose materials were present in the bituminous mixture which was due to inadvertence. The petitioner proposed before the department that necessary rectification would be done at the cost of the petitioner. The rectification work although allowed, could not be completed by the petitioner because of some difficulties due to the COVID-19 pandemic situation. Accordingly, the petitioner prayed for some more time for completion of the repair work.

Counsel for the petitioner, I. Choudhary submitted that due to incessant rains a landslide further damaged the approach road to the Raj Bhawan. In the aforesaid circumstance, PWRD, Assam had issued the order by which the petitioner was debarred for a period of 3 months with immediate effect from performing any work.

Thus, the petitioner filed the said petition challenging the order on the grounds that it was passed without following the due procedure of law.

Nath, counsel for respondents, upon instruction made a statement that neither any show-cause notice nor any opportunity was given to the petitioner before the impugned order was issued by the PWRD.

The law as regards the blacklisting of a contractor had been settled by the Supreme Court in Erusian Equipment & Chemicals Ltd. v. State of W.B., (1975) 1 SCC 70 wherein it has been provided that blacklisting has the effect of preventing a person from the privilege and advantage of entering into lawful relationship with the Government for purpose of gains and therefore the person concerned should be given an opportunity to represent his case before he is put on the blacklist.

An excerpt from the Erusian Equipment verdict is pertinent to refer here:

“The blacklisting order does not pertain to any particular contract. The blacklisting order involves civil consequences. It casts a slur. It creates a barrier between the persons blacklisted and the Government in the matter of transactions. The blacklists are “instruments of coercion”

The Court while relying on the above-mentioned Supreme Court verdict allowed the writ petition and held that, since the order of debarring the petitioner was set aside on a technical reason, the Court granted liberty to the respondent authorities to still proceed against the petitioner by following due procedure of law i.e. by issuing a show-cause notice or giving him an opportunity to present his case first.[Oriental Engineers v. State of Assam, 2020 SCC OnLine Gau 3443, decided on 19-08-2020]