CASE LAWS

2020-TIOL-72-SC-IT

SUPER MALLS PVT LTD Vs PR CIT: SUPREME COURT OF INDIA (Dated: March 05, 2020)

Income Tax - Sections 132, 133A & 153C

Keywords - Same AO - Search and seizure - Satisfaction note

THE DIT (Inv) conducted a search on the residential and business premises of the directors of the assessee company. During the search, a pen drive was recovered which contained details of sale of shops and offices in the mall operated by the assessee company. A survey was also conducted on the business premises of the assessee company. Based on the materials uncovered during the search, notice u/s 153C was issued. Since the AO of the individuals searched and the AO of the assessee was same, only one note was made regarding documents belonging to the assessee. The assessment proceedings led to certain addition. The assessment was challenged on the ground that the satisfaction note was invalid and thus the proceedings were vitiated. The CIT(A) dismissed the challenge and upheld the assessment. However, the ITAT found favours with the contention of the assessee and set aside the assessment as invalid. Thus, the revenue carried the matter before the High Court which allowed the appeal and restored the order of the CIT(A).

Having heard the parties, the Supreme Court held that,

Whether where the AO of the searched person is same as of the other person, then it is sufficient u/s 153C for the AO to note in the satisfaction note that the documents seized from the searched person belonged to the other person- YES: SC

Whether where the AO issuing notice u/s 153C is same as that of the searched person, there is no need to transmit the documents to the AO of the other person - YES: SC

++ before issuing notice u/s 153C , the AO of the searched person must be “satisfied” that, inter alia, any document seized or requisitioned “belongs to” a person other than the searched person. That thereafter, after recording such satisfaction by the AO of the searched person, he may transmit the records/documents/things/papers etc. to the AO having jurisdiction over such other person;

++ there can be two eventualities. It may so happen that the AO of the searched person is different from the AO of the other person and in the second eventuality, the AO of the searched person and the other person is the same. Where the AO of the searched person and the other person is the same, it is sufficient by the AO to note in the satisfaction note that the documents seized from the searched person belonged to the other person. Once the note says so, then the requirement of Section 153C is fulfilled. In case, where the AO of the searched person and the other person is the same, there can be one satisfaction note prepared by the AO, as he himself is the AO of the searched person and also the AO of the other person. However, as observed herein above, he must be conscious and satisfied that the documents seized/recovered from the searched person belonged to the other person. In such a situation, the satisfaction note would be qua the other person. The second requirement of transmitting the documents so seized from the searched person would not be there as he himself will be the AO of the searched person and the other person and therefore there is no question of transmitting such seized documents to himself;

++ from the satisfaction note recorded, it emerges that the AO is satisfied that the documents containing the details of the cash receipts on sale of shop/offices at M/s Super Mall, Karnal belonged to the other person – assessee – M/s Super Mall. He is also satisfied that the documents/pen drive are seized from the searched person. He is also satisfied that the documents so seized from the residence of the searched person/Ved Prakash Bharti belonged to the assessee – the other person. Therefore, the AO was satisfied and it is specifically mentioned that the documents so seized belonged to the assessee – the other person. Therefore, it cannot be said that the mandatory requirements of Section 153C have not been complied with. The satisfaction note by the AO clearly states that the documents so seized belonged to the other person – the assessee and not the searched person. Thus, the High Court is justified in observing that the requirement of Section 153C has been fulfilled. Thus, all the appeals fail and are dismissed.

2020-TIOL-71-SC-FEMA

SUBORNO BOSE Vs ENFORCEMENT DIRECTORATE: SUPREME COURT OF INDIA (Dated: March 5, 2020)

Foreign Exchange Management Act - Sections 10(6), 16(3), 46 & 47

Keywords - Continuing nature of offence - Non clearance of imported goods - Non-utilisation of foreign exchange

AN SCN was issued to the assessee in the relevant period, alleging contravention of the provisions of Section 10(6) of the Act, r/w Sections 46 and 47 of the Act. It was stated that a complaint had been filed against one M/s Zoom Enterprises Ltd, of which the assessee was the MD. The assessee filed reply claiming that his company purchased two Water Cooled Screw Chiller Unit Model and other accessories from a French company, and Air Handling and Fan Coil Unit from an American company. The import was made under EPCG license under the Open General License. The goods were imported and put in warehouse, since M/s Zoom had failed to get the goods released. The assessee subsequently took over the project and spent about Rs 5 crore on the project work. Owing to financial constraints, request was made to the Tourism Finance Corporation of India Ltd for sanctioning bank guarantee of Rs 40 lakhs, so as to secure release of the shipment from the Customs Department.

However, for reasons beyond the control of M/s Zoom or of the assessee, the shipment could not be cleared. More time was sought to get the goods cleared and to submit the Bill of Entry (Exchange Control Copy) with the authorised dealer. Reply to SCN was filed. On adjudication, it was concluded that the assessee-company had violated provisions of Section 10(6) of the FEMA Act r/w Section 46 & 47 thereof r/w relevant provisions of the (Current Account Transaction) of the Foreign Exchange Manual 2003-04, on account of the imported goods arriving in India but the importer failing to submit BoE and take delivery of the goods. It was held that though the goods for which foreign exchange was remitted had reached the users' destination, but the same were not released. Penalties were imposed on M/s Zoom as well as on the assessee. Such findings were upheld by the appellate authority. The assessee's appeal to the High Court was dismissed as well.

On appeal, the Apex Court held that,

Whether provisions of Section 10(6) of FEMA are applicable in cases where foreign exchange procured is not utilised for completing the import procedure - YES: SC

Whether contravention of Section 10(6) by not clearing imported goods & non-submission of BoE, is an offence which continues till corrective measures are taken by the parties concerned - YES: SC

Whether therefore, penalty imposed on the Managing Director of a company charged with contravention of Section 10(6), merits being upheld where such official at the helm of affairs, was aware of such violation, but did not take corrective steps - YES: SC

Whether in light of the continuing nature of the offence, the fact that such MD was not in charge at the time of the commission of offence, would be of any aid, considering that the MD subsequently knew of the such contravention, upon assuming charge - NO: SC

++ the real provision which needs to be reckoned for answering the controversy brought before this Court is Section 10(6) of the FEMA Act. This provision is a deeming provision pointing towards the specified circumstances, which would result in having committed contravention of the provisions of the FEMA Act or for the purpose of the stated Section. The specified circumstances are (i) when a person acquires or purchases foreign exchange for any purpose mentioned in the declaration made by him to authorised person does not use it for such purpose; (ii) that person does not surrender the acquired or purchased foreign exchange to authorised person within the specified period, and (iii) the person uses the acquired or purchased foreign exchange for any other purpose for which purchase or acquisition of foreign exchange is not permissible under the provisions of the FEMA Act or the rules or regulations or direction or order made thereunder. Each of these are standalone circumstances;

++ in the present case, the finding of fact is that the import of goods for which the foreign exchange was procured and remitted was not completed as the Bill of Entry remained to be submitted and the goods were kept in the bonded warehouse and the Company took no steps to clear the same. As a result, Section 10(6) of the FEMA Act is clearly attracted being a case of not using the procured foreign exchange for completing the import procedure. It is also possible to take the view that the Company should have taken steps to surrender the foreign exchange to the authorised person within the specified time as provided in Regulation 6 of the Foreign Exchange Management (Realisation, Repatriation and Surrender of Foreign Exchange) Regulations, 2000 issued by the Reserve Bank of India;

++ the High Court has opined that the contravention referred to in Section 10(6) by its very nature is a continuing offence. Such view is sustainable. It is indisputable that the penalty provided for such contravention is on account of civil obligation under the FEMA Act or the rules or regulations or direction or order made thereunder. If the delinquency is a civil obligation, the defaulter is obligated to make efforts by payment of the penalty imposed for such contravention. So long as the imported goods remained uncleared and obligation provided under the rules and regulations to submit Bill of Entry was not discharged, the contravention would continue to operate until corrective steps were taken by the Company and the persons in charge of the affairs of the Company;

++ the contravention referred to in Section 10(6) of the FEMA Act is a continuing actionable offence. If so, the Company and the persons managing the affairs of the Company remain liable to take corrective measures in right earnest. Considering the admitted fact that the assessee took over the management of the Company on 22.10.2001 and was fully alive to the default committed by the Company, yet failed to take corrective steps in right earnest. Notably, being conscious of such contravention, the assessee had sought indulgence of the authorities for more time. It must follow that the assessee cannot now be heard to contend that no liability could be fastened on him individually. Indeed, regulation 6 of the FEMA Regulations provides for the period within which the foreign exchange ought to be surrendered if the Company was not wanting to take delivery of the goods imported. That, however, does not mean that the contravention ceased to exist beyond the specified period. On the other hand, after the specified period as predicated in regulation 6 had expired, it would be a case of deemed contravention until rectified;

++ it is not the case of the assessee that he is not an officer or a person in charge of and responsible to the Company for the conduct of the business of the Company, as well as, the Company on or after 22.10.2001. Considering the fact that the assessee admittedly became aware of the contravention yet failed to take corrective measures until the action to impose penalty for such contravention was initiated, he cannot be permitted to invoke the only defence available in terms of proviso to subSection (1) of Section 42 of the FEMA Act that the contravention took place without his knowledge or that he exercised all due diligence to prevent such contravention. In the reply filed to the SCN by the assessee, no such specific plea has been taken;

++ to get benefit of the proviso to Section 42(1), the assessee should have pleaded and proved that the contravention took place without his knowledge or that he exercised all due diligence to prevent such contravention and made every effort to rectify the contravention in right earnest;

++ once it is held that the contravention is a continuing offence, the fact that the assessee was not looking after the affairs of the Company in the year 2000 would be of no avail to the assessee until corrective steps were taken in right earnest after his taking over the management of the Company and in particular after becoming aware about the contraventions. Hence no error has been committed by the adjudicating authority in finding that the appellant was also liable to be proceeded with for the contravention by the Company of which he became the Managing Director and for penalty therefor as prescribed for the contravention of Section 10(6) read with Sections 46 and 47 of the FEMA Act read with paragraphs A10 and A11 (Current Account Transaction) of the Foreign Exchange Manual 2003-04.

Assessee's appeal dismissed

2020-TIOL-70-SC-COFEPOSA-LB

ANKIT ASHOK JALAN Vs UoI: SUPREME COURT OF INDIA (Dated: March 4, 2020)

COFEPOSA - Petition is filed under Article 32 of the Constitution of India praying for quashing of the Detention Orders dated 01.07.2019 and for a direction that the detenues be set at liberty.

Held:

Majority view:

i) Whether the Detaining Authority was justified in deferring the consideration of the representation till the receipt of the opinion of the Central Advisory Board?

ii) Whether the Detaining Authority ought to have considered the representation independently and without waiting for the report of the Central Advisory Board?

++ First perspective on the issue whether a representation can independently be made to and must be considered by the Detaining Authority, who is a specially empowered officer of the concerned Government and the second, whether, in certain circumstances, the Detaining Authority ought to defer consideration of such representation till the report is received from the Advisory Board.

++ With the judgment of the Constitution Bench of this Court in Kamleshkumar [(1995) 4 SCC 51], the law on the first issue is well settled that where the detention order is made inter alia under Section 3 of the COFEPOSA Act by an officer specially empowered for that purpose either by the Central Government or the State Government, the person detained has a right to make a representation to the said officer; and the said officer is obliged to consider the said representation; and the failure on his part to do so would result in denial of the right conferred on the person detained to make a representation. Further, such right of the detenue has been taken to be in addition to the right to make the representation to the State Government and the Central Government. It must be stated that para 12 of the grounds of detention in the instant case, as quoted hereinabove, is in tune with the law so declared by this Court: Supreme Court by Majority [para 12]

iii) If the answer to the second question is yes, whether the time taken by the Detaining Authority from 27.11.2019 till 14.01.2020 could be characterised as undue and avoidable delay violating the constitutional rights of the detenues?

++ Decisions [in Pankaj Kumar Chakrabarty, Jayanarayan Sukul, Haradhan Saha, Frances Coralie Mullin vs. W.C. Khambra (1980) 2 SCC 275, K.M. Abdullah Kunhi, Golam Biswas] clearly lay down that the consideration of representations by the appropriate Government by the Board would always be qualitatively different and the power of consideration by the appropriate Government must be completely independent of any action by the Advisory Board - Since the decision of this Court in K.M. Abdulla Kunhi was rendered by the Constitution Bench of this Court after considering all the earlier decisions on the point including those in Pankaj Kumar Chakrabarty, Jayanarayan Sukul and Haradhan Saha, we are bound by the principles laid down therein - our answer to first two questions is that the Detaining Authority ought to have considered the representation independently and without waiting for the report of the Central Advisory Board - Thus, there was no valid explanation for non-consideration of the representation from 27.11.2019 till 14.01.2020 - We must, therefore, hold that complete inaction on part of the Detaining Authority in considering the representation caused prejudice to the detenues and violated their constitutional rights - Since there was complete inaction on part of the Detaining Authority in the present case, to whom a representation was addressed in dealing with the representation as stated above, we hold that the constitutional rights of the detenues were violated and the detenues are entitled to redressal on that count - We, therefore, allow this Writ Petition and hold the continued detention of the detenues in terms of the Detention Orders to be illegal, invalid and unconstitutional - This Writ Petition is therefore allowed - The Detention Orders are quashed and the detenues are directed to be set at liberty forthwith, unless their custody is required in connection with any other proceedings or crime: Supreme Court by Majority [para 15 to 18, 26 to 29]

Minority view: Per Hemant Gupta, J

+ In view of the aforesaid judgment [Golam Biswas v. Union of India and Another - 2015-TIOL-686-HC-DEL-COFEPOSA], I am of the opinion that once the detention order has been made by any of the authorities competent to detain in terms of Section 3 (1) of the COFEPOSA Act, the representation to seek revocation of the detention order can be considered and decided by the Detaining Authority dehors the decision of the Advisory Board and the acceptance of recommendation by the appropriate Government. The consideration for revocation of a detention order is limited to examining whether the order conforms with the provisions of law whereas the recommendation of the Advisory Board is on the sufficiency of material for detention, which alone is either confirmed or not accepted by the appropriate Government.

+ It would be a matter of prudence and propriety for the Detaining Authority to defer the decision on the representation to revoke the detention order, when the matter is being considered by the Advisory Board, consisting of three Hon ble sitting Judges of the High Court. The consideration of the representation by the Detaining Authority in these circumstances cannot be said to be delayed as the representation was received after the matter was referred to the Advisory Board.

+ Thus, I do not find any merit in the present writ petition. The same is dismissed. [para 20 to 24]

Petition allowed

2020-TIOL-69-SC-IT

CIT Vs CHETAK ENTERPRISES PVT LTD: SUPREME COURT OF INDIA (Dated: March 05, 2020)

Income Tax - Sections 80IA - Companies Act - Section 575

Keywords - Conversion into private company - Development of infrastructure project - Management of infrastructure project - Partnership firm

THE assessee, an erstwhile partnership firm, entered into an agreement with the State Government of Rajasthan, during the relevant period, for construction of road and collection of toll tax. Subsequently, the firm converted to a private company and was renamed as per Part IX of the Companies Act 1956. Upon intimation to the State PWD, the assessee's erstwhile registration was cancelled and fresh registration was granted to the assessee. When the road was inaugurated, the assessee began collecting toll tax. For the relevant AY, the assessee claimed deduction u/s 80IA. On assessment, such claim was denied by the AO. Thereafter, the CIT(A) reversed such findings and permitted the deduction claimed. The order of the CIT(A) was upheld by the ITAT, by considering its decision in the assessee's own case for a previous period. The Revenue's appeals to the High Court were dismissed.

On appeal, the Supreme Court was the view that,

Whether for claiming deduction u/s 80IA(4)(i)(a), the claimant has to be an enterprise engaged in developing, maintaining and/or operating any infrastructure facility wholly owned by a company registered in India - YES: SC

Whether for claiming deduction as per Section 80IA(4)(i)(b), the requirement is that the assessee must have entered into an agreement with the Central or State Govt or local authority for developing, maintaining and/or operating a new infrastructure facility - YES: SC

++ as a matter of fact, before the agreement was executed with the erstwhile partnership firm, it was clearly understood that the partnership firm would in due course be converted into a registered limited company. That is evident from the communication addressed to the Chief Engineer on 23.10.1998, at the time of replying to the notice inviting bids. An explicit request was made to allow the partnership firm to change its constitution and consequently change of name in the agreement after converting the firm into a company with the existing partners as its Directors. The Chief Engineer being the appropriate authority of the State, vide letter dated 27.8.1999, took note of the request made by the erstwhile partnership firm and informed the said firm that its offer was accepted subject to terms and conditions specified in that regard. It is only after this interaction, an agreement was entered into between the Government of Rajasthan and the erstwhile partnership firm, in which the communication sent by the Chief Engineer, dated 27.8.1999, was made part of the agreement. Notably, after the conversion of the partnership firm into a company under Part IX of the Companies Act, the State authorities noted the change and provided fresh registration code to the assessee Company;

++ it is manifest that all properties, movable and immovable (including actionable claims) belonging to or vested in a company at the date of its registration would vest in the company as incorporated under the Act. In other words, the property acquired by a promoter can be claimed by the company after its incorporation without any need for conveyance on account of statutory vesting. On such statutory vesting, all the properties of the firm, in law, vest in the company and the firm is succeeded by the company. The firm ceases to exist and assumes the status of a company after its registration as a company. A priori, it must follow that the business is carried on by the enterprise owned by a company registered in India and the agreement entered into between the erstwhile partnership firm and the State Government, by legal implication, assumes the character of an agreement between the company registered in India and the State Government for (i) developing, (ii) maintaining and operating or (iii) developing, maintaining and operating a new infrastructure facility;

++ for the purpose of considering compliance of clause (a) of Section 80IA(4)(i), the assessee must be an enterprise carrying on business of (i) developing, (ii) maintaining and operating or (iii) developing, maintaining and operating any infrastructure facility, which enterprise is owned by a company registered in India. That stipulation is fulfilled in the present case, as the registered firm was converted into a company under Part IX of the Companies Act on 28.3.2000, which is before the commencement of Assessment Year 2002-2003. For the assessment year under consideration, the activity undertaken by the assessee is only maintaining and operating or developing, maintaining and operating the infrastructure facility, inasmuch as, the construction of the road was completed on 27.3.2000 and the same was inaugurated on 1.4.2000, where after toll tax was being collected by the assessee Company;

++ as regards clause (b) of Section 80IA(4)(i), the requirement predicated is that the assessee must have entered into an agreement with the Central Government or a State Government or a local authority or any other statutory body for (i) developing, (ii) maintaining and operating or (iii) developing, maintaining and operating a new infrastructure facility. In the present case, the agreement was initially executed between the erstwhile partnership firm and the State Government, but with clear understanding that as and when the partnership firm is converted into a company, the name of the company in the agreement so executed be recorded recognising the change. Notably, the agreement itself mentions that M/s. Chetak Enterprises as party to the agreement was meant to include its successors and assignee. Further, the State Government had granted sanction to the company and the original agreement entered into with the firm automatically stood converted in favour of the assessee Company, which came into existence on 28.3.2000 being the successor of the erstwhile partnership firm. Thus understood, even the stipulation in clause (b) of Section 80IA(4)(i) is fulfilled by the assessee Company. Since these are the only two issues which weighed with the assessing officer to deny deduction to the assessee Company as claimed under Section 80IA of the Income Tax Act, the first appellate authority was justified in reversing the view taken by the assessing officer. For the same reason, the ITAT, as well as, the High Court have justly affirmed the view taken by the first appellate authority, holding that the assessee Company qualified for the deduction under Section 80IA being an enterprise carrying on the stated business pertaining to infrastructure facility and owned by a Company registered in India on the basis of the agreement executed with the State Government to which the assessee Company has succeeded in law after conversion of the partnership firm into a company.

Revenue's appeal dismissed