Month: March 2018

CBDT E-Assessment Instruction Reg S. 142(1) Notice Format

MASTI

The CBDT vide F.No. 225/157/2017/ITA-II dated 23-06-2017 had issued revised format of notices under section 143(2) of the Act so that the language of notices are in accordance with requirement of electronic proceedings and the same have already been provided in the system.

This was done by the CBDT To facilitate conduct of e-assessment proceedings.

The CBDT has now issued a letter bearing F.No. System/ITBA/Assessment/Notice 142(1)/2017-18 Dated: 19-03-2018 on the issue of e-assessment.

The CBDT has stated that the format of notice u/s 142(1) was not amended in conformity with e-assessment procedures and old format has been continued.

To correct this inconsistency, the CBDT has revised the format of notice u/s 142(1)(ii)&(iii).

It is stated by the CBDT that the revised format now incorporates the same language as in the 143(2) notice to facilitate the taxpayer to submit the documents and respond electronically and the requirement to visit the office has been removed

Text of CBDT E-Assessment Instruction On S. 142(1) & 143(2) notices format

F.No. System/ITBA/Assessment/Notice 142(1)/2017-18 Dated: 19-03-2018

To,
All Principal Chief Commissioners of Income-tax/ PrDGsIT/ CCsIT/ DGsIT ,
All Principal Commissioner of Income-tax/ PrDsIT/ DsIT/ CsIT/CsIT (Admin&TPS),
All Assessing Officers.
Sir/Madam:

Subject: Issue of notices under section 142(1)(ii) & (iii) of Income –tax Act 1961 in revised format- regd.

The concept of electronic assessment proceeding was introduced last year and its scope was gradually enlarged. The e-assessment proceeding is now facilitated through e-filing portal. The CBDT Instruction No. 01/2018, dated 12-02-2018 has mandated that except for search related assessments and exceptional circumstance mentioned therein all other pending scrutiny assessment cases shall be conducted only through the ‘E-Proceedings’ functionality in ITBA/E-filing.

2. To facilitate conduct of e-assessment proceedings, the CBDT vide F.No. 225/157/2017/ITA-II dated 23-06-2017 had issued revised format of notices under section 143(2) of the Act so that the language of notices are in accordance with requirement of electronic proceedings and the same have already been provided in the system. It may be mentioned that specifically the need to produce documents and to be present in person has been done away with except as provided in the aforementioned Instruction.

3. However, notice u/s 142(1) was not amended in conformity with e-assessment procedures and old format has been continued. To correct this inconsistency, the format of notice u/s 142(1)(ii)&(iii) has been revised and the same is enclosed herewith. This revised format now incorporates the same language as in the 143(2) notice to facilitate the taxpayer to submit the documents and respond electronically and the requirement to visit the office has been removed. This has also been implemented in ITBA system. Therefore, all the assessing officers are requested to use this format for the cases in e-assessment proceedings.

4. In case where notice u/s 142(1) (i) &(ii) is already issued in old format to the assessees, requiring them to furnish information mentioned in notice at the date and time fixed in the office of Assessing Officer, an SMS/Email is being sent to all such assessees intimating them to furnish the said information electronically through their account in e-filing website. Therefore any compliance of the assessee through his e-filing account in response to the notice issued in old format should be considered valid.

5. This is issued with prior approval of Pr. DGIT(S).

Yours sincerely

(Ramesh Krishnamurthi)
Addl. DG(S)-3, CBDT, New Delhi

Supreme Court Judgement On Construction In Mumbai

MASTI

In the latest judgement in MAHARASHTRA CHAMBER OF HOUSING INDUSTRY VERSUS MUNICIPAL CORPORATION OF GREATER MUMBAI the Supreme Court has held that a total prohibition on construction in Mumbai has serious ramifications on housing sector.

The Supreme Court has also held in the judgement that such a ban on construction has a serious impact on the financial loans which have been obtained by the developers and builders.

Such a ban makes serious inroads into the rights of citizens under Article 19, 21 and 300A of the Constitution of India, the Supreme Court has held in the judgement.

The Bench comprising of HON’BLE MR. JUSTICE S.A. BOBDE and HON’BLE MR. JUSTICE L. NAGESWARA RAOThough held that it might be equally true that the activities and the neglect in disposing of the debris invades the rights of other citizens under Article 21 etc. That issue is left open for a proper determination.

Text of Supreme Court judgement in MAHARASHTRA CHAMBER OF HOUSING INDUSTRY VERSUS MUNICIPAL CORPORATION OF GREATER MUMBAI

ITEM NO.10 COURT NO.7 SECTION IX

S U P R E M E C O U R T O F I N D I A
RECORD OF PROCEEDINGS

SPECIAL LEAVE PETITION (CIVIL) No.D23708/2017

(Arising out of impugned final judgment and order dated 26-02-2016
in CA No. 221/2013 29-02-2016 in CA No. 221/2013 04-05-2017 in RP
No. 3720/2017 passed by the High Court Of Judicature At Bombay)

MAHARASHTRA CHAMBER OF HOUSING INDUSTRY Petitioner(s)
VERSUS

MUNICIPAL CORPORATION OF GREATER MUMBAI & ORS. Respondent(s)

(FOR ADMISSION and I.R. and IA No.73411/2017-CONDONATION OF DELAY
IN FILING and IA No.73415/2017-EXEMPTION FROM FILING C/C OF THE
IMPUGNED JUDGMENT and IA No.73414/2017-PERMISSION TO FILE LENGTHY
LIST OF DATES )

Date : 15-03-2018 These petitions were called on for hearing today.

CORAM :
HON’BLE MR. JUSTICE S.A. BOBDE
HON’BLE MR. JUSTICE L. NAGESWARA RAO

For Petitioner(s) Mr. Mukul Rohatgi, Sr. Adv.
Mr. Shyam Divan, Sr. Adv.
Mr. Kunal Vajani, Adv.
Ms. Padhma Lakshmi Iyengar, Adv.
Mr. Nikhil Rohtgi, Adv.
Ms. Priyakshi Bhatnagar, Adv.
Mr. Shashank Khurana, Adv.
Mr. Pranaya Goyal, AOR

For Respondent(s) Mr. Ranjit Kumar, Sr. Adv.
Mr. Dhruv Mehta, Sr. Adv.
Mr. J.J. Xavier, Adv.
Mr. Ashish Wad, Adv.
Mrs. Jayashree Wad, Adv.
Ms. Sukriti Jaggi, Adv.
For M/S. J S Wad And Co, AOR

Mr. C.U. Singh, Sr. Adv.
Signature Not Verified
Mr. Rishabh Parikh, Adv.
Digitally signed by
SANJAY KUMAR
Date: 2018.03.16
Mr. E. C. Agrawala, AOR
Mr. Arnav Behari, Adv.
16:16:07 IST
Reason:
2

UPON hearing the counsel the Court made the following
O R D E R
These petitions have been preferred by the petitioner for seeking permission to carry on the construction which has been prohibited by the impugned judgment and order/s passed by the High Court.

We make it clear that this order is not intended to set aside or modify the aforesaid impugned judgment. We have considered the matter only in order to explore the possibility of safe method of permitting certain constructions in the city of Mumbai for a limited period to pave the way for further orders that may be passed.

Prima facie, we are satisfied that a total prohibition, though selective, has serious ramifications on housing sector which is of great significance in a city like Mumbai. It also has a serious impact on the financial loans which have been obtained by the developers and builders. Such a ban makes serious inroads into the rights of citizens under Article 19, 21 and 300A of the Constitution of India. Though it might be equally true that the activities and the neglect in disposing of the debris invades the rights of other citizens under Article 21 etc. That issue is left open for a proper determination.

We have heard the matter on several occasions and we are of the considered view that the following order should govern the construction activities in the city of Mumbai :

Primarily, the ban has been imposed by the Bombay High Court because of alarming impact of the inability of Respondent No.1 – Municipal Corporation of Greater Mumbai (for short, the ‘Municipal Corporation’) to deal with and safely dispose of the solid waste and construction debris that is generated by the activities of construction of buildings.

It was however argued before us that this construction debris can be safely disposed of at designated sites, whoever they belong to, provided the same are available for receiving and storing this debris. This, no doubt, assumes that construction activity will go on and that itself has deleterious effect on the population because of the waste particles which are dispersed in the air. We therefore direct that any construction that is permitted hereafter for the purpose of this order shall be only after adequate safeguards are employed by the builders for preventing dispersal of particles through the air. This shall be incorporated in the IOD, unless it is already so incorporated. According to the Municipal Corporation, ten sites have been located and inspected along with the representative/s of the Monitoring Committee. The land owners have given the consent or ‘No Objection Certificate’ (NOC) for bringing such debris onto specified locations which require to be filled with earth. In another words, these sites require land filling which will be done by this debris.

The Municipal Corporation shall permit a builder or developer to carry on construction on their sites by imposing the conditions in the IOD or any such permission, that the construction debris generated from this particular site, shall be transported and deposited in specific site inspected and approved by the Municipal Corporation.

The Municipal Corporation shall specify such a site meant for deposit of construction debris in the building permission or IOD. It shall also ensure compliance by regular inspection of both, the construction site and the landfill site. Any breach will entail the cancellation of the building permission or IOD and the work will be liable to be stopped immediately.

The landfill site shall be governed by the Construction and Demolition Waste Management Rules, 2016, which came into force with effect from 29.3.2016. In particular, the landfill sites shall be the “Sanitary landfill sites” as defined in the Solid Waste Management Rules, 2016. The Municipal Corporation shall ensure that the criteria “for development of facilities at the sanitary land-fills” shall be applied to the landfill sites as specified in paragraph (B) of Schedule I to the Solid Waste Management Rules, 2016. These Rules will apply to the extent they are relevant and necessary in relation to the landfill sites which are permitted to be used for disposal of construction debris under this order.

The Municipal Corporation shall not permit any construction whether in respect of pre-existing IOD or fresh IOD unless it has first located a landfill site and has obtained ‘No Objection Certification’ or consent of the land owner that such debris may be deposited on that particular site. The Municipal Corporation shall incorporate in the IOD the condition that the construction is being permitted only if such construction debris is deposited.

In so far as the ‘small generators’ of Construction and Demolition [“C&D”] Waste are concerned, the C&D Waste shall be disposed of in accordance with the ‘Debris On-Call Scheme’ initiated by Respondent No.1 Municipal Corporation, whereunder the agencies appointed by the Respondent No.1 Municipal Corporation shall through its authorised appointed agencies pick up and collect the C&D Waste which shall be transported to/unloaded at the designated disposal sites and used for creating infrastructure facility of dumping grounds, covering of Municipal Solid Waste and preparation of internal roads/loops within the dumping ground premises as well as in accordance with the provisions of Construction and Demolition Waste Management Rules, 2016.

In so far as the ‘large generators’ of C&D Waste are concerned, the C&D Waste shall be disposed of as per the Waste/Debris Management Plan submitted by the owner/developer at the time of applying for an IOD and as approved by the Solid Waste Management department of Respondent No.1 Municipal Corporation, wherein neither Deonar nor Mulund dumping sites shall be included as designated disposal sites as well as in accordance with the provisions of Construction and Demolition Waste Management Rules, 2016.

In the event for any reason whatsoever the consent given by the disposal site owner/authority is revoked and/or in the event the time limit during which the disposal site was available has expired, the relevant construction activity will be stopped after issuance of a Show Cause Notice and till such the Waste Management Plan/Debris Management Plan has been appropriately amended to provide a new disposal site for dumping of C&D Waste and is approved by Respondent No.1 Municipal Corporation. The applicant for development permissions shall give the Bank Guarantee to the tune of Rs.5 lacs to Rs.50 lacs depending upon the size project and mode of development, which bank guarantee shall remain in force solely for the purpose of ensuing compliance of the Waste Management Plan/Debris Management Plan approved by Respondent No.1 Municipal Corporation from time to time, till the grant/issuance of the Occupation Certificate. The Monitoring Committee shall be entitled to inspect the record of the Municipal Corporation for pertaining to the grant of IODs and shall also be entitled to visit and inspect the landfill sites. The Monitoring Committee shall be entitled to bring to the notice of the Municipal Corporation any breach in the permission or in the conditions of IOD of building permission. The Municipal Corporation shall pass a speaking order on such objections within a period of one month.

In view of the above, the Municipal Corporation shall submit a detailed report to this Court after the expiry of six months. This order shall remain in force for a period of six months from today. It is made clear that no construction debris will be carried for disposal to the Deonar and Mulund dumping sites. List the matter after six months along with the report of Respondent No.1 Municipal Corporation.

(SANJAY KUMAR-II) (INDU KUMARI POKHRIYAL)
COURT MASTER (SH) ASST.REGISTRAR

S. 14A Rule 8D: Read Latest Supreme Court Judgement In MAXOPP INVESTMENT

MASTI

The law on section 14A and Rule 8D have been explained in the latest Supreme Court judgement in MAXOPP INVESTMENT LTD VERSUS COMMISSIONER OF INCOME TAX.

The judgement of the Supreme Court is dated 12th February 2018.

The bench comprised of Justice A.K. SIKRI) and Justice ASHOK BHUSHAN.

The Supreme Court held that the issue that falls for consideration is as to whether the dominant purpose test, which is pressed into service by the assessees would apply while interpreting Section 14A of the Act or we have to go by the theory of apportionment.

The Court expressed the opinion that the dominant purpose for which the investment into shares is made by an assessee may not be relevant even though Maxopp Investment Limited may have made the investment in order to gain control of the investee company.

It was held by the Supreme Court in the latest judgement that this was not a relevant factor in determining the issue at hand because such dividend income is non-taxable.

In this scenario, if expenditure is incurred on earning the dividend income, that much of the expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure, it was held.

It was further held by the Supreme Court that keeping this objective behind Section 14A of the Act in mind, the said provision has to be interpreted, particularly, the word ‘in relation to the income’ that does not form part of total income.

The principle of apportionment of expenses comes into play as that is the principle which is engrained in Section 14A of the Act, the Supreme Court held following Walfort Share and Stock Brokers P Ltd.

Full Text of Supreme Court judgement in MAXOPP INVESTMENT LTD VERSUS COMMISSIONER OF INCOME TAX

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS. 104-109 OF 2015

MAXOPP INVESTMENT LTD. …..APPELLANT(S)

VERSUS

COMMISSIONER OF INCOME TAX,
NEW DELHI …..RESPONDENT(S)

WITH

CIVIL APPEAL NO. 1423 OF 2015

CIVIL APPEAL NO. 3267 OF 2013

CIVIL APPEAL NO. 130 OF 2015

CIVIL APPEAL NOS. 110-112 OF 2015

CIVIL APPEAL NO. 1500 OF 2018
(ARISING OUT OF SLP (CIVIL) NO. 19614 OF 2013)

CIVIL APPEAL NO. 1508 OF 2018
(ARISING OUT OF SLP (CIVIL) NO. 31417 OF 2016)
Signature Not Verified

Digitally signed by
ASHWANI KUMAR
Date: 2018.03.13
17:10:40 IST
Reason: CIVIL APPEAL NO. 115 OF 2015

CIVIL APPEAL NO. 8596 OF 2014
2

CIVIL APPEAL NO. 1505 OF 2018
(ARISING OUT OF SLP (CIVIL) NO. 27054 OF 2016)

CIVIL APPEAL NOS. 10096 OF 2013

CIVIL APPEAL NO. 123 OF 2015

CIVIL APPEAL NO. 6590 OF 2015

CIVIL APPEAL NO. 1576 OF 2018
(@ SPECIAL LEAVE PETITION (CIVIL) NO. 4024 OF 2018
@ DIARY NO. 39820 OF 2017)

CIVIL APPEAL NO. 1579 OF 2018
(ARISING OUT OF SLP (CIVIL) NO. 20475 OF 2017)

CIVIL APPEAL NO. 1578 OF 2018
(ARISING OUT OF SLP (CIVIL) NO. 23123 OF 2017)

CIVIL APPEAL NO. 18019 OF 2017

CIVIL APPEAL NO. 1580 OF 2018
(ARISING OUT OF SLP (CIVIL) 32405 OF 2017)

CIVIL APPEAL NO. 1575 OF 2018
(@ SPECIAL LEAVE PETITION (CIVIL) NO. 4023 OF 2018
@ DIARY NO. 36413 OF 2017)

CIVIL APPEAL NO. 2802 OF 2018
(@ SPECIAL LEAVE PETITION (CIVIL) NO. 6746 OF 2018
@ DIARY NO. 1146 OF 2018)

CIVIL APPEAL NO. 2791 OF 2018
3

(@ SPECIAL LEAVE PETITION (CIVIL) NO. 6685 OF 2018
@ DIARY NO. 39823 OF 2017)

CIVIL APPEAL NO. 2792 OF 2018
(@ SPECIAL LEAVE PETITION (CIVIL) NO. 6686 OF 2018
@ DIARY NO. 41903 OF 2017)

CIVIL APPEAL NO. 1577 OF 2018
(@ SPECIAL LEAVE PETITION (CIVIL) NO. 4027 OF 2018
@ DIARY NO. 41890 OF 2017)

CIVIL APPEAL NO. 2793 OF 2018
(@ SPECIAL LEAVE PETITION (CIVIL) NO. 6687 OF 2018
@ DIARY NO. 41203 OF 2017)
AND
CIVIL APPEAL NO. 2794 OF 2018
(@ SPECIAL LEAVE PETITION (CIVIL) NO. 6688 OF 2018
@ DIARY NO. 41922 OF 2017)

JUDGMENT
A.K. SIKRI, J.

Chapter IV of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) contains the provisions pertaining to ‘computation of total income’. Section 14 which is the first provision under this Chapter enumerates five heads of income within which all income are to be classified. Under the scheme of the Act, certain types of income are exempt from tax and, in this behalf, specific provisions are made stipulating that such incomes would not form part of the total income under the Act as fortiorari, they are not included under any of the heads of income and, therefore, no taxes levied on such exempted incomes. It is in this backdrop, Section 14A of the Act clarifies that if any expenditure is incurred in earning that income which does not form part of the total income, such expenditure shall also not be allowed as deduction. Though, Section 14A was inserted by the Finance Act, 2001, but it was given retrospective effect from April 1, 1962. Original Section was in the following terms:

“Section 14A – For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.”

2) By the Finance Act, 2006, the aforesaid provision was amended whereby it was renumbered as sub-section (1) and sub-sections (2) and (3) were added thereto. Before that, a proviso was also added by amendment vide Finance Act, 2002 which was to operate retrospectively from May 11, 2001. In these batch of appeals, we are not concerned with sub-sections (2), (3) or the proviso and it is only interpretation that has to be given to sub-section (1), which arises for consideration.

3) Though, it is clear from the plain language of the aforesaid provision that no deduction is to be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act, the effect whereof is that if certain income is earned which is not to be included while computing total income, any expenditure incurred to earn that income is also not allowed as a deduction. It is well known that tax is leviable on the net income. Net income is arrived at after deducting the expenditures incurred in earning that income.

Therefore, from the gross income, expenditure incurred to earn that income is allowed as a deduction and thereafter tax is levied on the net income. The purpose behind Section 14A of the Act, by not permitting deduction of the expenditure incurred in relation to income, which does not form part of total income, is to ensure that the assessee does not get double benefit. Once a particular income itself is not to be included in the total income and is exempted from tax, there is no reasonable basis for giving benefit of deduction of the expenditure incurred in earning such an income.

For example, income in the form of dividend earned on shares held in a company is not taxable. If a person takes interest bearing loan from the Bank and invests that loan in shares/stocks, dividend earned therefrom is not taxable. Normally, interest paid on the loan would be expenditure incurred for earning dividend income. Such an interest would not be allowed as deduction as it is an expenditure incurred in relation to dividend income which itself is spared from tax net. There is no quarrel upto this extent.

4) However, in these appeals, the question has arisen under varied circumstances where the shares/stocks were purchased of a company for the purpose of gaining control over the said company or as ‘stock-in-trade’. However, incidentally income was also generated in the form of dividends as well. On this basis, the assessees contend that the dominant intention for purchasing the share was not to earn dividends income but control of the business in the company in which shares were invested or for the purpose of trading in the shares as a business activity etc.

In this backdrop, the issue is as to whether the expenditure incurred can be treated as expenditure ‘in relation to income’ i.e. dividend income which does not form part of the total income. To put it differently, is the dominant or main object would be a relevant consideration in determining as to whether expenditure incurred is ‘in relation to’ the dividend income. In most of the appeals, including in Civil Appeal Nos. 104-109 of 2015, aforesaid is the scenario.

Though, in some other cases, there may be little difference in fact situation. However, all these cases pertain to dividend income, whether it was for the purpose of investment in order to retain controlling interest in a company or in group of companies or the dominant purpose was to have it as stock-in-trade.

5) Before we proceed further, we may briefly note the facts of Civil Appeal Nos. 104-109 of 2015, for better understanding of the issue involved.

The appellant company is engaged, inter alia, in the business of finance, investment and dealing in shares and securities. The appellant holds shares/securities in two portfolios, viz. (a) as investment on capital account; and, (b) as trading assets for the purpose of acquiring and retaining control over investee group companies, particularly Max India Ltd., a widely held quoted public limited company.

Any profit/loss arising on sale of shares/securities held as ‘investment’ is returned as income under the head ‘capital gains’, whereas profit/loss arising on sale of shares/securities held as ‘trading assets’ (i.e. held, inter alia, with the intention of acquiring, exercising and retaining control over investee group companies) has been regularly offered and assessed to tax as business income under the head ‘profits and gains of business or profession’.

Consistent with the aforesaid treatment regularly followed, the appellant filed return for the previous year relevant to the Assessment Year 2002-03, declaring income of Rs.78,90,430/-. No part of the interest expenditure of Rs.1,16,21,168/- debited to the profit and loss account, to the extent relatable to investment in shares of Max India Limited, yielding tax free dividend income, was considered disallowable under Section 14A of the Act on the ground that shares in the said company were acquired for the purposes of retaining controlling interest and not with the motive of earning dividend. According to the appellant, the dominant purpose/intention of investment in shares of Max India Ltd. was acquiring/retaining controlling interest therein and not earning dividend and, therefore, dividend of Rs.49,90,860/- earned on shares of Max India Ltd. during the relevant previous year was only incidental to the holding of such shares. The Assessing Officer (AO), while passing the assessment order dated August 27, 2004, under Section 143(3) worked out disallowance under Section 14A of the Act at Rs.67,74,175/- by apportioning the interest expenditure of Rs.1,16,21,168/- in the ratio of investment in shares of Max India Ltd. (on which dividend was received) to the total amount of unsecured loan. The AO, however, restricted disallowance under that Section to Rs.49,90,860/- being the amount of dividend received and claimed exempt.

6) In appeal, the Commissioner of Income Tax (Appeals) {CIT(A)} vide order dated January 12, 2005 upheld the order of the AO. The appellant herein carried the matter in further appeal to the Income Tax Appellate Tribunal, New Delhi (for short the ‘ITAT’). In view of the conflicting decisions of various Benches by the ITAT with respect to the interpretation of Section 14A of the Act, a Special Bench was constituted in the matter of ITO v. Daga Capital Management (Private) Ltd. 1 The appeal of the appellant was also tagged and heard by the aforesaid Special Bench.

7) The Special Bench of the ITAT in the case of Daga Capital Management (Private) Ltd., dismissing the appeal of the appellant, 1 312 ITR (AT) 1 inter alia, held that investment in shares representing controlling interest did not amount to carrying on of business and, therefore, interest expenditure incurred for acquiring shares in group companies was hit by the provisions of Section 14A of the Act. The Special Bench further held that holding of shares with the intention of acquiring/retaining controlling interest would normally be on capital account, i.e. as investment and not as ‘trading assets’. For that reason too, the Special Bench held that there existed dominant connection between interest paid on loan utilized for acquiring the aforesaid shares and earning of dividend income. Consequently, the provisions of Section 14A of the Act were held to be attracted on the facts of the case.

8) On the interpretation of the expression ‘in relation to’, the majority opinion of the Special Bench was that the requirement of there being direct and proximate connection between the expenditure incurred and exempt income earned could not be read into the provision. According to the majority view, ‘what is relevant is to work out the expenditure in relation to the exempt income and not to examine whether the expenditure incurred by the assessee has resulted into exempt income or taxable income’.

As per the minority view, however, the existence of dominant and immediate connection between the expenditure incurred and dividend income was a condition precedent for invoking the provisions of Section 14A of the Act. It was accordingly held, as per the minority, that mere receipt of dividend income, incidental to the holding of shares, in the case of a dealer in shares, would not be sufficient for invoking provisions of Section 14A of the Act.

9) Against the aforesaid order of the Special Bench, the appellant preferred appeal under Section 260A of the Act to the High Court. The High Court of Delhi has, vide impugned judgment dated November 18, 2011, held that the expression ‘in relation to’ appearing in Section 14A of the Act was synonymous with ‘in connection with’ or ‘pertaining to’, and, that the provisions of that Section apply regardless of the intention/motive behind making the investment. As a consequence, proportionate disallowance of the expenditure incurred by the assessee is maintained.

10) It would be pertinent to point out at this stage that Punjab and Haryana High Court in a recent judgment in the case of Principal Commissioner of Income Tax v. State Bank of Patiala2 has taken a view which runs contrary to the aforesaid view taken by the Delhi High Court. The Punjab and Haryana High Court followed, with approval, the judgment of the High Court of Karnataka in CCI Ltd. v. Joint Commissioner of Income Tax, Udupi Range 3 The Revenue has filed appeals challenging the correctness of the aforesaid decisions. Thus, in view of conflict of opinions of various High Courts, these batch of 2 (2017) 391 ITR 218 (P&H) 3 (2012) 206 Taxman 563 appeals are by those assessees who were lost before the High Court and by the Income Tax Department against the judgments of the High Court where the view taken is favourable to the assessee and against the Revenue.

11) Before adverting to the discussions on these judgments, let us go through the relevant statutory provisions, as that would enable us to appreciate the ratio of these cases more appropriately. Since the focus of discussion is Section 14A of the Act, we reproduce Section 14A in its entirety hereinbelow:

“Expenditure incurred in relation to income not includible in total income.
14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act :

Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.”

12) Sub-section (2) of Section 14A deals with the proportionality as it empowers the AO to extricate that amount of expenditure which is incurred in relation to such income which does not form part of the total income under the Act. However, this is to be done ‘in accordance with such method as may be prescribed.’ This prescription is provided by the delegated legislation, in the form of Rule 8D of the Income Tax Rules, 1962 (for short ‘Rules’) which Rule was inserted w.e.f. March 24, 2008 vide Income Tax (Fifth Amendment) Rules, 2008 4. We, thus, reproduce Rule 8D hereunder:

“Method for determining amount of expenditure in relation to income not includible in total income.

8D.(1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with—

(a) the correctness of the claim of expenditure made by the assessee; or
(b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).
(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:— 4 In Civil Appeal No. 2165 of 2012 (Commissioner of Income Tax, Mumbai v. M/s. Essar Teleholdings Ltd. through its Manager pronounced on January 31, 2018, this Court has held that Rule 8D is prospective in nature.

(i) the amount of expenditure directly relating to income which does not form part of total income;
(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely:— Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year;

B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year;

C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year;

(iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year.

(3) For the purposes of this rule, the “total assets” shall mean, total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets.”

13) With the aforesaid statutory scheme in mind, we traverse through the judgments of the Delhi High Court in Maxopp Investment Ltd. and that of Punjab and Haryana High Court in State Bank of Patiala.

JUDGMENT OF DELHI HIGH COURT IN MAXOPP INVESTMENT LTD.

14) Three questions fell for consideration before the High Court. For the purpose of these appeals, it is only question No. 1 which is relevant, and formulation thereof by the High Court was as under:

“1. Whether expenditure (including interest paid on funds borrowed) in respect of investment in shares of operating companies for acquiring and retaining a controlling interest therein is hit by section 14A of the Income tax Act, 1961 inasmuch as the dividend received on such shares does not form part of the total income?”

15) On facts, it was noted that the assessee company is in the business of finance, investment and was dealing in shares and securities. The assessee held shares and securities, partly as investments on the “capital account” and partly as “trading assets” for the purpose of acquiring and retaining control over its group companies, primarily Max India Ltd.

As per the assessee, any profit resulting on the sale of shares held as trading assets was duly offered to tax as business income of the assessee. During the previous year relevant to the assessment year 2002-03, the assessee incurred total interest expenditure of Rs. 1,61,21,168/-, which was claimed as business expenditure under section 36(1)(iii) of the Income Tax Act, 1961 (hereinafter referred to as “the said act”). According to the assessee, the expenditure claimed was not hit by section 14A of the Act, on the ground that although borrowed funds were partly utilised for investment in shares held as trading assets, such investment was made with the intention to acquire and retain a controlling interest in the aforesaid company and that the receipt of dividend thereon was merely incidental.
The High Court then took note of legislative history of Section 14A of the Act and Rule 8D of the Rules.

Thereafter, the Court went on to discuss the law which stood prior to insertion of Section 14A. Taking note of certain judgments, the High Court observed that prior to the insertion of Section 14A in the Act, the law was that when an assessee had a composite and indivisible business, which had elements of both taxable and non-taxable income, the entire expenditure in respect of the said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. However, where the business was divisible, the principle of apportionment of the expenditure was applicable and the expenditure apportioned to the ‘exempt’ income or income not exigible to tax, was not allowable as a deduction.

The High Court, then, took cognizance of the legislative intent and objective behind the insertion of Section 14A by referring to the Memorandum Explaining the Provisions of the Finance Bill, 2001. It also reproduced passages from few judgments of this Court. Since, for the purpose of the present case, it is necessary to keep in mind the objectives behind this provision, we reproduce that part of the discussion hereunder:

“Objective behind insertion of section 14A

15. The object behind the insertion of section 14A in the said Act is apparent from the Memorandum explaining the provisions of the Finance Bill 2001 which is to the following effect:-

“Certain incomes are not includable while computing the total income as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income.

It is proposed to insert a new section 14A so as to clarify the intention of the Legislature since the inception of the Income-tax Act, 1961, that no deduction shall be made in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the Income-tax Act.

The proposed amendment will take effect retrospectively from April 1, 1962 and will accordingly, apply in relation to the assessment year 1962-63 and subsequent assessment years.”

16. As observed by the Supreme Court in the case of CIT v. Walfort Share and Stock Brokers P Ltd: 326 ITR 1 (SC), the insertion of section 14 A with retrospective effect reflects the serious attempt on the part of Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the said act against the taxable income. The Supreme Court further observed as under:-

“.. In other words, section 14 A clarifies that expenses incurred can be allowed only to the extent that they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of an exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income…”

“..Expenses allowed can only be in respect of earning taxable income. This is the purport of section 14A. In section 14A, the first phrase is “for the purposes of computing the total income under this Chapter” which makes it clear that various heads of income as prescribed in the Chapter IV would fall within section 14A. The next phrase is, “in relation to income which does not form part of total income under the Act”. It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A..

(Emphasis supplied)”

17. The Supreme Court also clearly held that in the case of an income like dividend income which does not form part of the total income, any expenditure/deduction relatable to such (exempt or non-taxable) income, even if it is of the nature specified in sections 15 to 59 of the said Act, cannot be allowed against any other income which is includable in the total income. The exact words used by the Supreme Court are as under:-

“Further, section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax.

The permissible deductions enumerated in sections 15 to 59 are now to be allowed only with reference to income which is brought under one of the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduction though of the nature specified in sections 15 to 59 but related to the income not forming part of the total income could not be allowed against other income includable in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14 A.

(emphasis supplied)”

16) The High Court then undertook the exercise of analysing the provisions of Section 14A of the Act and, in the process, examined the contours and scope of the expressions ‘in relation to’ and ‘expenditure incurred’ occurring therein. The High Court pointed out that contention of the assessees, in this behalf, was that the word ‘incurred’ must be taken literally in the sense that the expenditure must have actually taken place. Moreover, the expenditure must also have taken place in relation to income which does not form part of total income. Further, the expression “in relation to” implies that there must be a direct and proximate connection with the subject matter.

In other words, only that actual expenditure which is made directly and for the object of earning exempt income (in the present appeals – dividend income) could be disallowed under section 14A of the Act. If the dominant and main objective of spending was not the earning of ‘exempt’ income then, the expenditure could not be disallowed under section 14A of the Act provided it was otherwise allowable under sections 15 to 59 of the said Act. The High Court, however, did not agree with the aforesaid propositions advanced by the learned counsel for the assessees which according to it was mired by several difficulties. Distinguishing the case law cited by the assessees where the expression ‘in relation to’ was interpreted by this Court, as not applicable in the present context, the High Court, instead, referred to the judgment in the case of Doypack Systems Pvt. Ltd. v. Union of India5 wherein this Court has held that expressions ‘pertaining to’, ‘in relation to’ and ‘arising out of’ used in the deeming provisions, are used in an expansive sense.

It also referred to the judgment of this Court in CIT v. Walfort Share and Stock Brokers P Ltd.6 wherein this Court has held that the basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure and on the same analogy the exemption is also in respect of net income. In other words, where the gross income would not form part of total income, it’s associated or related expenditure would also not be permitted to be debited against other taxable income.

17) Likewise, explaining the meaning of ‘expenditure incurred’, the High Court agreed that this expression would mean incurring of actual expenditure and not to some imagined expenditure. At the same time, observed the High Court, the ‘actual’ expenditure that is in contemplation under section 14A(1) of the said Act is the ‘actual’ expenditure in relation to or in connection with or pertaining to exempt income. The corollary to this is that if no expenditure is incurred in relation to the exempt income, no disallowance can be made under section 14A of the said Act. On the basis of the aforesaid discussion, the High Court answered the question formulated by it in the affirmative.

5 (1988) 2 SCC 299
6 (2010) 326 ITR 1 (SC)

JUDGMENT OF PUNJAB AND HARYANA HIGH COURT IN STATE BANK OF PATIALA

18) This case arose in the context where exempt income in the form of dividend was earned by the Bank from securities held by it as its stock in trade. The assessee filed its return declaring an income of about Rs.670 crores which was selected for scrutiny. The return showed dividend income exempt under section 10(34) and (35) of about Rs.11.07 crores and net interest income exempt under section 10(15)(iv)

(h) of about Rs.1.12 crores. The total exempt income claimed in the return was, therefore, Rs.12,19,78,015/-. The assessee while claiming the exemption contended that the investment in shares, bonds, etc. constituted its stock-in-trade; that the investment had not been made only for earning tax free income; that the tax free income was only incidental to the assessee’s main business of sale and purchase of securities and, therefore, no expenditure had been incurred for earning such exempt income; the expenditure would have remained the same even if no dividend or interest income had been earned by the assessee from the said securities and that no expenditure on proportionate basis could be allocated against exempt income.

The assessee also contended that in any event it had acquired the securities from its own funds and, therefore, section 14A was not applicable. The AO restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D holding that Section 14A would be applicable. The CIT(A) issued notice of enhancement under Section 251 of the Act and held that in view of Section 14A of the Act, the assessee was not to be allowed any deduction in respect of income which is not chargeable to tax. Therefore, he disallowed the entire expenditure claimed instead of restricting the disallowance to the amount which was claimed as exempt income as done by the AO.

The ITAT set aside the order of the AO as well as CIT(A). It referred to a CBDT Circular No.18/2015 dated 02.11.2015 which states that income arising from investment of a banking concern is attributable to the business of banking which falls under the head “Profits and gains of business and profession”. The circular states that shares and stock held by the bank are ‘stock-in-trade’ and not ‘investment’. Referring to certain judgments (which we will also refer to) and the earlier orders of the Tribunal, it was held that if shares are held as stock-in-trade and not as investment even the disallowance under rule 8D would be nil as rule 8D(2)(i) would be confined to direct expenses for earning the tax exempt income. In the aforesaid factual backdrop, in appeal filed by the Revenue, the High Court noted that following substantial question of law arose for consideration:

“Whether in the facts and circumstances of the case, the Hon’ble ITAT is right in law in deleting the addition made on account of disallowance under section 14A of the Income Tax Act, 1961?”

19) In its analysis, the High Court accepted the contention of the counsel for the assessee that the assessee is engaged in the purchase and sale of shares as a trader with the object of earning profit and not with a view to earn interest or dividend. The assessee does not have an investment portfolio. The securities constitute the assessee’s stock-in-trade. The Department, in fact, rightly accepted, as a matter of fact, that the dividend and interest earned was from the securities that constituted the assessee’s stock-in-trade. The same is, in any event, established. The assessee carried on the business of sale and purchase of securities. It was supported by Circular No.18, dated November 02, 2015, issued by the CBDT, which reads as under:-

“Subject: Interest from Non-SLR securities of Banks – Reg.

It has been brought to the notice of the Board that in the case of Banks, field officers are taking a view that, “expenses relatable to investment in non-SLR securities need to be disallowed u/s 57(i) of the Act as interest on non-SLR securities is income from other sources.”

2. Clause (id) of sub-section (1) of Section 56 of the Act provides that income by way of interest on securities shall be chargeable to income-tax under the head “Income from Other Sources”, if, the income is not chargeable to income-tax under the head “Profits and Gains of Business and Profession”.

3. The matter has been examined in light of the judicial decisions on this issue. In the case of CIT Vs Nawanshahar Central Cooperative Bank Ltd. [2007] 160TAXMAN 48(SC), the Apex Court held that the investments made by a banking concern are part of the business of banking. Therefore, the income arising from such investments is attributable to the business of banking falling under the head “Profits and Gains of Business and Profession”.

3.2 Even though the abovementioned decision was in the context of co-operative societies/Banks claiming deduction under section 80P(2)(a)(i) of the Act, the principle is equally applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 applies.

4. In the light of the Supreme Court’s decision in the matter, the issue is well settled. Accordingly, the Board has decided that no appeals may henceforth be filed on this ground by the officers of the Department and appeals already filed, if any, on this ground before Courts/Tribunals may be withdrawn/not pressed upon. This may be brought to the notice of all concerned.

(emphasis supplied)”

20) The High Court pointed out that the Circular carves out a distinction between stock-in-trade and investment and provides that if the motive behind purchase and sale of shares is to earn profit then the same would be treated as trading profit and if the object is to derive income by way of dividend then the profit would be said to have accrued from the investment. If the assessee is found to have treated the shares and securities as stock-in-trade, the income arising therefrom would be business income. A loss would be a business loss. Thus, an assessee may have two portfolios, namely, investment portfolio and a trading portfolio. In the case of the former, the securities are to be treated as capital assets and in the latter as trading assets.

21) Further, as a banking institution, the assessee was also statutorily required to place a part of its funds in approved securities, as held in CIT v. Nawanshahar Central Co-operative Bank Ltd. 7. Since, the shares, bonds, debentures purchased by the assessees constituted its stock-in-trade, the provisions of Section 14A were not applicable. Here, the Court noted distinction between stock-in-trade and investment and made the following observations:

“17. Under section 14A, an expenditure can be disallowed only if it is incurred by the assessee in relation to income exempt from tax. The dividend or interest from the assessee’s stock-in-trade i.e. the securities was exempt from tax in view of sections 10(15)(iv)(h),(34) and (35). This was incidental to its business of banking. The business income on account of the assessee trading in the securities is assessable under the head “Profits and gains of business and profession”. The expenditure incurred in relation to stock-in-trade arising as a result of investment in shares and debentures is deductible under sections 28 to 37. There is a distinction between stock-in-trade and investment. The object of earning profit from trading in securities is different from the object of earning income, such as, dividend and interest arising therefrom. The object of trading in securities does not constitute the activity of investment where the object is to earn dividend or interest.”

22) The High Court then discussed in detail the judgment in Walfort Share and Stock Brokers P Ltd. which related to dividend stripping.

After explaining the objective behind Section 14A of the Act (which is already noted above), this Court in the facts of that case, had held that a payback does not constitute an ‘expenditure incurred’ in terms of Section 14A as it does not impact the profit and loss account. This expenditure, in fact, is a payout.

23) According to the High Court, what is to be disallowed is the

7 (2007) 289 ITR 6 (SC)

expenditure incurred to “earn” exempt income. The words ‘in relation to’ in Section 14A must be construed accordingly. Applying that principle to the facts at hand, the High Court concluded as under:

“Now, the dividend and interest are income. The question then is whether the assessee can be said to have incurred any expenditure at all or any part of the said expenditure in respect of the exempt income viz. dividend and interest that arose out of the securities that constituted the assessee’s stock-in-trade. The answer must be in the negative.

The purpose of the purchase of the said securities was not to earn income arising therefrom, namely, dividend and interest, but to earn profits from trading in i.e. purchasing and selling the same. It is axiomatic, therefore, that the entire expenditure including administrative costs was incurred for the purchase and sale of the stock-in-trade and, therefore, towards earning the business income from the trading activity of purchasing and selling the securities. Irrespective of whether the securities yielded any income arising therefrom, such as, dividend or interest, no expenditure was incurred in relation to the same.”

24) We may also note here that the High Court referred to the judgment of the Karnataka High Court in CCI Ltd. case and concurred therewith. This judgment in CCI Ltd. is, however, a very short judgment which records the submission of counsel for the parties very briefly and thereafter the entire discussion is contained in para 5 that reads as under:
“5. When no expenditure is incurred by the assessee in earning the dividend income, no notional expenditure could be deducted from the said income. It is not the case of the assessee retaining any shares so as to have the benefit of dividend. 63% of the shares, which were purchased, are sold and the income derived therefrom is offered to tax as business income.

The remaining 37% of the shares are retained. It has remained unsold with the assessee. It is those unsold shares have yielded dividend, for which, the assessee has not incurred any expenditure at all. Though the dividend income is exempted from payment of tax, if any expenditure is incurred in earning the said income, the said expenditure also cannot be deducted.

But in this case, when the assessee has not retained shares with the intention of earning dividend income and the dividend income is incidental to his business of sale of shares, which remained unsold by the assessee, it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income and that should be disallowed from deductions. In that view of the matter, the approach of the authorities is not in conformity with the statutory provisions contained under the Act.
Therefore, the impugned orders are not sustainable and require to be set aside.”

25) At this stage, it will also be useful to refer a judgment of Calcutta High Court in Commissioner of Income Tax v. G.K.K. Capital Markets (P.) Ltd.8 which has also agreed with the view taken by the Karnataka High Court. In that case, the assessee was engaged in the business of share trading. In the computation of income, the assessee claimed long-term capital gains as exempt income and declared expenditure disallowable against it under Section 14A of the Act.

The AO treated the long-term capital gains as business income. The Appellate Tribunal found that the assessee did not have any investment and all the shares were held as stock-in-trade as was evident from the orders of the lower authorities. On those facts it held that once the assessee had kept the shares as stock-in-trade, Rule 8D of the Rules would not apply. On the questions whether the Appellate Tribunal was justified in deleting the disallowance under Section 14A computed in accordance with Rule 8D 8 (2017) 392 ITR 196 (Cal) and in holding the investments as shares stock-in-trade, the High Court held that the AO had accepted the correctness of the disallowable expenditure offered by the assessee on its claim of the amount as long-term capital gains.

He had not allowed the claim itself treating the amount as business income to thereafter disallow the offered expenditure. According to the High Court, since the finding of fact was recorded by the AO regarding the exempt income claimed being treated as business income and the shares held by the assessee having been treated as stock-in-trade, there could not have been disallowance of expenditure under Section 14A of the Act and that provision had no application.

26) It would be pertinent to mention that earlier judgment of the same High Court in the case of Dhanuka and Sons v. CIT9 was cited by the Revenue. However, this judgment was distinguished on the ground that, in that case, there was no dispute that part of the income of the assessee from its business was from dividend whereas the assessee was unable to produce any material before the authorities below showing the source from which such shares were acquired. For better understanding, it would be necessary to note the discussion in the case of Dhanuka and Sons, which was reproduced by the High Court in G.K.K. Capital Markets (P.) Ltd. Para 6 to para 9 of Dhanuka and 9 (2011) 339 ITR 319 (Cal) Sons read as under:

“6. Mr. Sarkar, the learned advocate appearing on behalf of the revenue, has, on the other hand, supported the order passed by the Tribunal and has contended that the assessee itself having failed to produce material in support of its contention, the Assessing Officer rightly assessed the deductible income on proportionate basis. Mr. Sarkar submits that the same is in conformity with Rule 8D of the Income tax Rule and thus, we should not interfere with the order passed by the Tribunal.

7. After hearing the learned counsel appearing for the parties and after going through the materials on record and the decisions cited by Mr. Khaitan, we find that the Supreme Court in the cases of CIT v. Maharastra Sugar Mills Ltd. [1971] 82 ITR 452 and Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 450/109 Taxman 145 having held that where there is one indivisible business giving rise to taxable income as well as exempt income, the entire expenditure incurred in relation to that business would have to be allowed even if a part of the income earned from the business is exempt from tax, section 14A of the Act was enacted to overcome those judicial pronouncements. The object of section 14A of the Act is to disallow the direct and indirect expenditure incurred in relation to income which does not form part of the total income.

8. In the case before us, there is no dispute that part of the income of the assessee from its business is from dividend which is exempt from tax whereas the assessee was unable to produce any material before the authorities below showing the source from which such shares were acquired. Mr. Khaitan strenuously contended before us that for the last few years before the relevant previous year, no new share has been acquired and thus, the loan that was taken and for which the interest is payable by the assessee was not for acquisition of those old shares and, therefore, the authorities below erred in law in giving benefit of proportionate deduction.

9. In our opinion, the mere fact that those shares were old ones and not acquired recently is immaterial. It is for the assessee to show the source of acquisition of those shares by production of materials that those were acquired from the funds available in the hands of the assessee at the relevant point of time without taking benefit of any loan. If those shares were purchased from the amount taken in loan, even for instance, five or ten years ago, it is for the assessee to show by the production of documentary evidence that such loaned amount had already been paid back and for the relevant assessment year, no interest is payable by the assessee for acquiring those old shares.

In the absence of any such materials placed by the assessee, in our opinion, the authorities below rightly held that proportionate amount should be disallowed having regard to the total income and the income from the exempt source. In the absence of any material disclosing the source of acquisition of shares which is within the special knowledge of the assessee, the assessing authority took a most reasonable approach in assessment.”

27) We have already stated as to how the two divergent opinions have emerged from different High Courts and the respective reasons in support of these conflicting outcome. Obviously, assessees are banking upon the reasons which prevailed with the High Courts that have taken the view which are favourable to the assessees and the Revenue is relying upon the reasoning given by Delhi High Court as well as Calcutta High Court in Dhanuka and Sons case. Therefore, it may not be necessary to give a detailed narrative of the arguments which were advanced by various counsel appearing for the assessees as well as counsel for the Revenue. A brief resume of their submissions would serve the purpose.

28) Insofar as assessees are concerned, their arguments are recapitulated in brief hereinbelow:

(i) The holding of investment in group companies representing controlling interest, amounts to carrying on business, as held in the various cases.

(ii) Notwithstanding that dividend income is assessable under the head “income from other sources”, in view of the mandatory prescription in Section 56 of the Act, the nature of dividend income has to be ascertained on the facts of the case. Where dividend is earned on shares held as stock-in-trade/shares purchased for acquiring/retaining controlling interest, dividend income is in the nature of business income.

(iii) Interest paid on loans borrowed for acquiring shares representing controlling interest in the investee company is allowable business expenditure in terms of Section 36(1)(iii) of the Act, since acquiring controlling interest in companies and managing, administering, financing and rehabilitating such companies are for business and/or professional purposes and not for earned dividend.

(iv) Conversely, interest paid on funds borrowed for investment in shares representing controlling interest does not represent expenditure incurred for earning dividend income and is not allowable under Section 57(iii) of the Act (prior to introduction of Section 14A).

29) Basing their case on the aforesaid principles, it was argued that when the shares were acquired, as part of promoter holding, for the purpose of acquiring controlling interest in the company, the dominant object is to keep control over the management of the company and not to earn the dividend from investment in shares. Whether dividend is declared/earned or not is immaterial and, in either case, the assessee would not liquidate the shares in investee companies.

Therefore, no expenditure was made ‘in relation to’ the income i.e. the dividend income and, therefore, Section 14A would not be attracted. In this hue, it was submitted that Section 14A was to be accorded plain and grammatical interpretation meaning thereby mandating and requiring a direct and proximate nexus/link between the expenditure actually incurred and the earning of the exempt income.

It was also argued that even if contextual/purposive interpretation is to be given, that also called for direct and proximate connection between the expenditure incurred and earning of dividend. According to the learned counsel appearing for the assessees, the legislative intention behind inserting Section 14A in this statute was to exclude both, viz. the receipts which are exempt under the provisions of the Act as well as expenditure actually incurred ‘in relation thereto’ from entering into the computation of assessable income, so as to remove the double benefit to the assessee (i) in the form of exempt income, on which no tax is leviable; and (ii) providing deduction in respect of expenditure actually incurred which directly resulted in the earning of exempt income by the assessee.

30) Mr. K. Radhakrishnan, learned senior counsel appearing for the Revenue, on the other hand, made a fervent plea to accept the view taken by the Delhi High Court. He submitted that the objective behind insertion of Section 14A of the Act manifestly pointed out that expenditure incurred in respect of income earned, which is exempted from tax, has to be disallowed. He also pointed out that this message was eloquently brought out by this Court in Walfort Share and Stock Brokers P Ltd. case.

Otherwise, argued the learned senior counsel, the assessee will get double benefit, one, in the form of exemption from income tax insofar as dividend income is concerned and other by getting deduction on account of expenditure as well. He, thus, submitted that expression ‘in relation to’ had to be given expansive meaning in order to sub-serve the purpose of the said provision. He also emphasised that literal meaning of Section 14A of the Act pointed towards that and that was equally the purpose behind the insertion of Section 14A as well.

31) We have given our thoughtful consideration to the argument of counsel for the parties on both sides, in the light of various judgments which have been cited before us, some of which have already been taken note of above.

32) In the first instance, it needs to be recognised that as per section 14A(1) of the Act, deduction of that expenditure is not to be allowed which has been incurred by the assessee “in relation to income which does not form part of the total income under this Act”.

Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includible in total income that has to be disallowed. If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income.

33) There is no quarrel in assigning this meaning to section 14A of the Act. In fact, all the High Courts, whether it is the Delhi High Court on the one hand or the Punjab and Haryana High Court on the other hand, have agreed in providing this interpretation to section 14A of the Act. The entire dispute is as to what interpretation is to be given to the words ‘in relation to’ in the given scenario, viz. where the dividend income on the shares is earned, though the dominant purpose for subscribing in those shares of the investee company was not to earn dividend. We have two scenarios in these sets of appeals.

In one group of cases the main purpose for investing in shares was to gain control over the investee company. Other cases are those where the shares of investee company were held by the assessees as stock-in-trade (i.e. as a business activity) and not as investment to earn dividends. In this context, it is to be examined as to whether the expenditure was incurred, in respective scenarios, in relation to the dividend income or not.

34) Having clarified the aforesaid position, the first and foremost issue that falls for consideration is as to whether the dominant purpose test, which is pressed into service by the assessees would apply while interpreting Section 14A of the Act or we have to go by the theory of apportionment. We are of the opinion that the dominant purpose for which the investment into shares is made by an assessee may not be relevant. No doubt, the assessee like Maxopp Investment Limited may have made the investment in order to gain control of the investee company.

However, that does not appear to be a relevant factor in determining the issue at hand. Fact remains that such dividend income is non-taxable. In this scenario, if expenditure is incurred on earning the dividend income, that much of the expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure. Keeping this objective behind Section14A of the Act in mind, the said provision has to be interpreted, particularly, the word ‘in relation to the income’ that does not form part of total income. Considered in this hue, the principle of apportionment of expenses comes into play as that is the principle which is engrained in Section 14A of the Act. This is so held in Walfort Share and Stock Brokers P Ltd., relevant passage whereof is already reproduced above, for the sake of continuity of discussion, we would like to quote the following few lines therefrom.

“The next phrase is, “in relation to income which does not form part of total income under the Act”. It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A..

xxx xxx xxx The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14 A.”

35) The Delhi High Court, therefore, correctly observed that prior to introduction of Section 14A of the Act, the law was that when an assessee had a composite and indivisible business which had elements of both taxable and non-taxable income, the entire expenditure in respect of said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. The principle of apportionment was made available only where the business was divisible.

It is to find a cure to the aforesaid problem that the Legislature has not only inserted Section 14A by the Finance (Amendment) Act, 2001 but also made it retrospective, i.e., 1962 when the Income Tax Act itself came into force. The aforesaid intent was expressed loudly and clearly in the Memorandum explaining the provisions of the Finance Bill, 2001. We, thus, agree with the view taken by the Delhi High Court, and are not inclined to accept the opinion of Punjab & Haryana High Court which went by dominant purpose theory.

The aforesaid reasoning would be applicable in cases where shares are held as investment in the investee company, may be for the purpose of having controlling interest therein. On that reasoning, appeals of Maxopp Investment Limited as well as similar cases where shares were purchased by the assessees to have controlling interest in the investee companies have to fail and are, therefore, dismissed.

36) There is yet another aspect which still needs to be looked into. What happens when the shares are held as ‘stock-in-trade’ and not as ‘investment’, particularly, by the banks? On this specific aspect, CBDT has issued circular No. 18/2015 dated November 02, 2015.

37) This Circular has already been reproduced in Para 19 above. This Circular takes note of the judgment of this Court in Nawanshahar case wherein it is held that investments made by a banking concern are part of the business or banking. Therefore, the income arises from such investments is attributable to business of banking falling under the head ‘profits and gains of business and profession’.

On that basis, the Circular contains the decision of the Board that no appeal would be filed on this ground by the officers of the Department and if the appeals are already filed, they should be withdrawn. A reading of this circular would make it clear that the issue was as to whether income by way of interest on securities shall be chargeable to income tax under the head ‘income from other sources’ or it is to fall under the head ‘profits and gains of business and profession’.

The Board, going by the decision of this Court in Nawanshahar case, clarified that it has to be treated as income falling under the head ‘profits and gains of business and profession’. The Board also went to the extent of saying that this would not be limited only to co-operative societies/Banks claiming deduction under Section 80P(2)(a)(i) of the Act but would also be applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 applies.

38) From this, Punjab and Haryana High Court pointed out that this circular carves out a distinction between ‘stock-in-trade’ and ‘investment’ and provides that if the motive behind purchase and sale of shares is to earn profit, then the same would be treated as trading profit and if the object is to derive income by way of dividend then the profit would be said to have accrued from investment. To this extent, the High Court may be correct. At the same time, we do not agree with the test of dominant intention applied by the Punjab and Haryana High Court, which we have already discarded. In that event, the question is as to on what basis those cases are to be decided where the shares of other companies are purchased by the assessees as ‘stock-in-trade’ and not as ‘investment’. We proceed to discuss this aspect hereinafter.

39) In those cases, where shares are held as stock-in-trade, the main purpose is to trade in those shares and earn profits therefrom. However, we are not concerned with those profits which would naturally be treated as ‘income’ under the head ‘profits and gains from business and profession’. What happens is that, in the process, when the shares are held as ‘stock-in-trade’, certain dividend is also earned, though incidentally, which is also an income.

However, by virtue of Section 10 (34) of the Act, this dividend income is not to be included in the total income and is exempt from tax. This triggers the applicability of Section 14A of the Act which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Share and Stock Brokers P Ltd. case. Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring those shares will have to be apportioned.

40) We note from the facts in the State Bank of Patiala cases that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding that section 14A of the Act would be applicable.

In spite of this exercise of apportionment of expenditure carried out by the AO, CIT(A) disallowed the entire deduction of expenditure. That view of the CIT(A) was clearly untenable and rightly set aside by the ITAT. Therefore, on facts, the Punjab and Haryana High Court has arrived at a correct conclusion by affirming the view of the ITAT, though we are not subscribing to the theory of dominant intention applied by the High Court. It is to be kept in mind that in those cases where shares are held as ‘stock-in-trade’, it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial.

In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd. where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone.
Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits. In the result, the appeals filed by the Revenue challenging the judgment of the Punjab and Haryana High Court in State Bank of Patiala also fail, though law in this respect has been clarified hereinabove.

41) Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment.

In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO.

42) Civil Appeal No. 1423 of 2015 is filed by M/s. Avon Cycles Limited, Ludhiana, wherein the AO had invoked section 14A of the Act read with Rule 8D of the Rules and apportioned the expenditure. The CIT(A) had set aside the disallowance, which view was upturned by the ITAT in the following words:

“…Admittedly the assessee had paid total interest of Rs.2.92 crores out of which interest paid on term loan raised for specific purpose totals to Rs.1.70 crores and balance interest paid by the assessee is Rs.1.21 crores. The funds utilized by the assessee being mixed funds and in view of the provisions of Rule 8D(2)(ii) of the Income Tax Rules the disallowance is confirmed at Rs.10,49,851/-, we find no merit in the ad hoc disallowance made by the CIT (Appeals) at Rs.5,00,000/-.

Consequently, ground of appeal raised by the Revenue is partly allowed and ground raised by the assessee in cross-objection is allowed…” Taking note of the aforesaid finding of fact, the High Court has dismissed the appeal of the assessee observing as under:

“In the present case, after examining the balance-sheet of the assessee, a finding of fact has been recorded that the funds utilized by the assessee being mixed funds, therefore, the interest paid by the assessee is also an interest on the investments made. Such being a finding of fact, we do not find that any substantial question of law arises for consideration of this Court.” After going through the records and applying the principle of apportionment, which is held to be applicable in such cases, we do not find any merit in Civil Appeal No. 1423 of 2015, which is accordingly dismissed.

43) Few appeals are filed by the Revenue against the assessees which pertained to the period prior to the introduction of Rule 8D of the Rules. Here, the case is decided in favour of the assessees also on the ground that Rule 8D of the Rules is prospective in nature and could not have been made applicable in respect of the Assessment Years prior to 2007 when this Rule was inserted. This view has already been upheld by this Court in Civil Appeal No. 2165 of 2012 (Commissioner of Income Tax, Mumbai v. M/s. Essar Teleholdings Ltd. through its Manager), pronounced on January 31, 2018, that the said Rule is prospective in nature. On this ground alone, these appeals of the Revenue fail as it is not necessary to go into the other issues.

44) To sum up:

(a) Appeals of the assessees, i.e. Civil Appeal Nos. 104-109, 110-112, 130, 1423 of 2015, are dismissed.

(b) Appeals of the Revenue, i.e. Civil Appeal Nos. 3267, 19614, 10096 of 2013, 8596 of 2014, 18019 of 2017, 115, 123, 6590 of 2015, Civil Appeals arising out of SLP (C) Nos. 27054, 31417 of 2016, 20475, 23123, 32405 of 2017, Diary Nos. 36413, 39820, 39823, 41890, 41903, 41922 of 2017 and 1146 of 2018 are dismissed.

(c) Appeal of the Revenue, i.e. Civil Appeal arising out of Diary No. 41203 of 2017, is allowed.

………………………………………J.

(A.K. SIKRI) ………………………………………J.

(ASHOK BHUSHAN) NEW DELHI;

FEBRUARY 12, 2018.

Latest Supreme Court Judgement On Mutuality Principle For Co-op Hsg Societies

MASTI

In the latest judgement dated 12th March 2018 in INCOME TAX OFFICER VERSUS VENKATESH PREMISES COOPERATIVE SOCIETY LTD the Supreme Court has considered whether certain receipts by co­operative societies, from its members i.e. non­occupancy charges, transfer charges, common amenity fund charges and certain other charges, are exempt from income tax based on the doctrine of mutuality.

The challenge by the department before the Supreme Court was based on the premise that such receipts are in the nature of business income, generating profits and surplus, having an element of commerciality and therefore exigible to tax.

The assessee in Civil Appeal No.1180 of 2015 assailed the finding that such receipts, to the extent they were beyond the limits specified in the Government notification dated 09.08.2001 issued under Section 79­A of the Maharashtra Co­operative Societies Act, 1960 (hereinafter referred to as ‘the Act’) was exigible to tax falling beyond the mutuality doctrine.

The Revenue submitted before the Supreme Court that the receipts were exigible to tax no sooner that mutuality came to an end and the receipts had an element of profit, also generating a surplus, rendering commerciality to the nature of the activity.

The Supreme Court noted in the judgement the submission of the department that the benefit of a common identity between the contributors and the participants could not alone be the final test.

The Tribunal had correctly held that the transferee not being a member at the time of payment, the doctrine of mutuality had no application to such receipts. The principle of mutuality could not be invoked to prevent taxability of high value receipts by a society selling properties and then inducting such purchasers as members.

Text of Supreme Court judgement in INCOME TAX OFFICER VERSUS VENKATESH PREMISES COOPERATIVE SOCIETY LTD

IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.2706 OF 2018
(arising out of SLP (C) No(s). 30194/2010)

INCOME TAX OFFICER, MUMBAI ….APPELLANT(S)
VERSUS
VENKATESH PREMISES COOPERATIVE
SOCIETY LTD. ….RESPONDENT(S)

with
CIVIL APPEAL NO. 3827 OF 2012
CIVIL APPEAL NO. 3271 OF 2012
CIVIL APPEAL NO.3272 OF 2012
CIVIL APPEAL NO.1180 OF 2015
CIVIL APPEAL NO.2997 OF 2017
CIVIL APPEAL NO.8741 OF 2017

CIVIL APPEAL NO(s).2708 OF 2018
(arising out of SLP(C) No. 32061/2010)
CIVIL APPEAL NO(s).2707 OF 2018
(arising out of SLP(C) No. 30195/2010)
CIVIL APPEAL NO(s).2713 OF 2018
(arising out of SLP(C) No. 32914/2010
CIVIL APPEAL NO(s).2710 OF 2018
(arising out of SLP(C) No. 32913/2010
CIVIL APPEAL NO(s).2709 OF 2018
Signature Not Verified
(arising out of SLP(C) No. 32063/2010)
Digitally signed by
BALA PARVATHI
CIVIL APPEAL NO(s).2711 OF 2018
(arising out of SLP(C) No. 32065/2010)
Date: 2018.03.13
15:46:41 IST
Reason:

CIVIL APPEAL NO(s).2712 OF 2018
(arising out of SLP(C) No. 34087/2010)

1
CIVIL APPEAL NO(s).2716 OF 2018
(arising out of SLP(C) No. 35120/2010
CIVIL APPEAL NO(s).2714 OF 2018
(arising out of SLP(C) No. 32918/2010)
CIVIL APPEAL NO(s).2715 OF 2018
(arising out of SLP(C) No. 34061/2010)
CIVIL APPEAL NO(s).2717 OF 2018
(arising out of SLP(C) No. 128/2011)
CIVIL APPEAL NO(s).2728 OF 2018
(arising out of SLP(C) No. 16967/2011)
CIVIL APPEAL NO(s).2718 OF 2018
(arising out of SLP(C) No. 133/2011)
CIVIL APPEAL NO(s).2720 OF 2018
(arising out of SLP(C) No. 367/2011)
CIVIL APPEAL NO(s).2721 OF 2018
(arising out of SLP(C) No. 370/2011)
CIVIL APPEAL NO(s).2719 OF 2018
(arising out of SLP(C) No. 378/2011)
CIVIL APPEAL NO(s).2722 OF 2018
(arising out of SLP(C) No. 2623/2011)
CIVIL APPEAL NO(s).2724 OF 2018
(arising out of SLP(C) No. 2745/2011
CIVIL APPEAL NO(s).2726 OF 2018
(arising out of SLP(C) No. 4096/2011)
CIVIL APPEAL NO(s).2723 OF 2018
(arising out of SLP(C) No. 2744/2011)
CIVIL APPEAL NO(s).2725 OF 2018
(arising out of SLP(C) No. 3283/2011)
CIVIL APPEAL NO(s).2727 OF 2018
(arising out of SLP(C) No. 5382/2011)
CIVIL APPEAL NO(s).2729 OF 2018
(arising out of SLP(C) No. 17102/2011)
CIVIL APPEAL NO(s).2730 OF 2018
(arising out of SLP(C) No. 17667/2011)
CIVIL APPEAL NO(s).2731 OF 2018
(arising out of SLP(C) No. 19992/2012)
CIVIL APPEAL NO(s).2732 OF 2018
(arising out of SLP(C) No. 19993/2012)

2
CIVIL APPEAL NO(s).2733 OF 2018
(arising out of SLP(C) No. 17428/2015)
CIVIL APPEAL NO(s).2734 OF 2018
(arising out of SLP(C) No. 29755/2013)
CIVIL APPEAL NO(s).2735 OF 2018
(arising out of SLP(C) No. 17430/2015)
CIVIL APPEAL NO(s).2736 OF 2018
(arising out of SLP(C) No. 17431/2015)
CIVIL APPEAL NO(s).2740 OF 2018
(arising out of SLP(C) No. 37702/2016)
CIVIL APPEAL NO(s).2739 OF 2018
(arising out of SLP(C) No. 36157/2016)
CIVIL APPEAL NO(s).2737 OF 2018
(arising out of SLP(C) No. 34865/2016)
CIVIL APPEAL NO(s).2738 OF 2018
(arising out of SLP(C) No. 34866/2016)
CIVIL APPEAL NO(s).2741 OF 2018
(arising out of SLP(C) No. 4122/2017)
CIVIL APPEAL NO(s).2742 OF 2018
(arising out of SLP(C) No. 4126/2017)
CIVIL APPEAL NO(s).2743 OF 2018
(arising out of SLP(C) No. 12234/2017)
CIVIL APPEAL NO(s).2766­2767 OF 2018
(arising out of SLP(C)Nos.6582­6583/2018 @ Diary No(s). 14603/2017)
CIVIL APPEAL NO(s).2747 OF 2018
(arising out of SLP(C) No. 19340/2017)
CIVIL APPEAL NO(s).2744 OF 2018
(arising out of SLP(C) No. 18935/2017)
CIVIL APPEAL NO(s).2768­2769 OF 2018
(arising out of SLP(C)Nos.6585­6586 @ Diary No(s). 14672/2017)
CIVIL APPEAL NO(s).2771­2772 OF 2018
(arising out of SLP(C)Nos.6587­6588/2018 @ Diary No(s). 14675/2017)
CIVIL APPEAL NO(s).2770 OF 2018
(arising out of SLP(C)No.6589/2018 @ Diary No(s). 14674/2017)
CIVIL APPEAL NO(s). 2746 OF 2018
(arising out of SLP(C) No. 18944/2017)
CIVIL APPEAL NO(s). 2745 OF 2018
(arising out of SLP(C) No. 18943/2017)

3
CIVIL APPEAL NO(s). 2765 OF 2018
(arising out of SLP(C)No.6550/2018 @ Diary No(s). 18867/2017)

JUDGMENT
NAVIN SINHA, J.

Delay condoned. Leave granted in all the Special Leave Petitions.

2. A common question of law arises for consideration in this batch of appeals, whether certain receipts by co­operative societies, from its members i.e. non­occupancy charges, transfer charges, common amenity fund charges and certain other charges, are exempt from income tax based on the doctrine of mutuality. The challenge is based on the premise that such receipts are in the nature of business income, generating profits and surplus, having an element of commerciality and therefore exigible to tax. The assessee in Civil Appeal No.1180 of 2015 assails the finding that such receipts, to the extent they were beyond the limits specified in the Government notification dated 09.08.2001 issued under Section 79­A of the Maharashtra Co­operative Societies Act, 1960 (hereinafter referred to as ‘the Act’) was exigible to tax falling beyond the mutuality doctrine.

3. The primary facts, for better appreciation shall be noticed from SLP (C) No.30194 of 2010. The assessing officer held that receipt of non­occupancy charges by the society from its members, to the extent that it was beyond 10% of the service charges/maintenance charges permissible under the notification dated 09.08.2001, stands excluded from the principle of mutuality and was taxable. The order was upheld by the Commissioner of Income Tax (Appeals). The Income Tax Appellate Tribunal held that the notification dated 09.08.2001 was applicable to co­operative housing societies only and did not apply to a premises society. It further held that the transfer fee paid by the transferee member was exigible to tax as the transferee did not have the status of a member at the time of such payment and, therefore, the principles of mutuality did not apply. The High Court set aside the finding that payment by the transferee member was taxable while upholding taxability of the receipt beyond that specified in the government notification.

4. Shri K.R. Radhakrishnan, learned senior counsel appearing on behalf of the Revenue in all the appeals, submitted that the receipts were exigible to tax no sooner that mutuality came to an end and the receipts had an element of profit, also generating a surplus, rendering commerciality to the nature of the activity. The benefit of a common identity between the contributors and the participants could not alone be the final test. The Tribunal had correctly held that the transferee not being a member at the time of payment, the doctrine of mutuality had no application to such receipts. The principle of mutuality could not be invoked to prevent taxability of high value receipts by a society selling properties and then inducting such purchasers as members. The validity of the notification dated 09.08.2001 having been upheld by the Bombay High Court in The New India Co­ operative Housing Society vs. The State of Maharashtra, 2013 (2) MHLJ 666, any receipt by the society beyond that permissible in the law under the notification, was not only illegal, but also amounted to rendering of services for profit attracting an element of commerciality and thus was taxable. It stands to reason that if the society levied maintenance charge upon a resident member at the rate of Rs.1.35 per sq.ft./p.m. and charged the much higher rate of Rs.7/­ per sq.ft./p.m. as non­occupancy charges from others, the society was acting commercially to earn profit. Reliance was placed on Commissioner of Income Tax, Madras vs. Kumbakonam Mutual Benefit Fund Ltd., AIR 1965 SC 96 = (1964) 8 SCR 204, Chelmsford Club vs. Commissioner of Income Tax, (2000) 3 SCC 214.

5. Sri Radhakrishnan, sought to invoke Article 43B of the Constitution of India mandating professional management of co­operative societies, to justify taxability of receipts beyond that permissible under the government notification. Reliance was further placed on Article 243ZI to submit that economic participation had to be restricted to members and had no application to a transferee who was not a member, rendering receipt from them sans mutuality taxable.

6. The submission on behalf of the respondents shall be considered cumulatively for convenience except to the extent necessary. Relying on Mittal Court Premises Co­operative Society Ltd. vs. Income Tax Officer, (2010) 320 ITR 414 (Bom), it was submitted that the notification dated 09.08.2001 was restricted in its application to housing co­operative societies only and had no application to a premises Society. Any receipt by the latter beyond the same was thus not exigible to tax on that ground.

7. The receipt by a housing co­operative society of an amount beyond that mentioned in the notification dated 09.08.2001, if it was contrary to the law, would be actionable at the instance of the person required to pay such charges as was the case in The New India Co­operative Housing Society (supra). Such receipts will not be exigible to tax so long as the doctrine of mutuality stood satisfied by commonality of identity between the contributors and the participants, and the contribution by the members was utilised for the common benefit of all the members.

8. The receipt of transfer fee before induction to membership under some of the bye­laws shall not be liable to tax as the money was returned in the event that the person was not admitted to membership. The appropriation by the society took place only after admission to membership. Once a person was admitted to membership, the members forming a class, and the identity of the individual member being irrelevant, the principle of mutuality was automatically attracted. The receipt essentially was from a member and the fact that for convenience, part of it may have been paid by the transferee, was irrelevant as ultimately the amount was utilised for the mutual benefit of the members including the fresh inductee member.

9. Likewise, non­occupancy charges were levied for the purpose of general maintenance of the premises of the Society and provision of other facilities and general amenities to the members. The fact that such members who were not in self occupation may have had to pay at a higher rate was irrelevant so long as the receipts were utilised for the benefit of the members as a class. It is not the case of the Revenue that such receipts had been utilised for any purpose other than the common benefit of the members. Even if any amount was left over as surplus at the end of the financial year after meeting maintenance and other common charges, that would constitute surplus fund of the society to be used for the common benefit of members and to meet heavy repairs and other contingencies and will not partake the character of profit or commerciality so as to be exigible to tax.

10. Relying on Commissioner of Income Tax­21 vs. Jai Hind Co­operative House Construction Society, (2012) 349 ITR 541 (Bom), it was contended that premium receipts by a housing society for allowing a member to construct using extra FSI was also not taxable on principles of mutuality as the receipts were utilised by the society for maintenance and infrastructure including to defray the extra burden on account of the additional FSI constructed.

11. Fresh construction by a society itself, utilising extra FSI available, with grant of occupancy rights only to a member who may have had to pay more as membership fees than an existing member, will likewise not detract from the principle of mutuality as the contribution was ultimately to be used for the maintenance, repairs and facilities to members in the society including the additional construction. There could be no bifurcation between the receipts and costs to deny exemption to the extent paid by the new members to qualify the same as non­mutual. Crucially, the admission to membership preceded the payment and allotment of premises was done by draw of lottery.

12. It was next submitted that every receipt could not ipso facto be classified as income, relying on Commissioner of Income Tax, Mumbai vs. D.P. Sandhu Bros. Chembur (P) Ltd., (2005) 273 ITR 1 (SC). Referring to CIT vs. Royal Western India Turf Club Ltd., AIR 1954 SC 85, it was submitted that so long as the three tests to determine mutuality and commonality of interests were met, there could not be exigiblity to tax under the general understanding of the doctrine of mutuality that a person could not make a profit from himself. Reliance was also placed on Commissioner of Income Tax, Bihar vs. M/s. Bankipur Club Ltd., (1997) 226 ITR 97 (SC ) = (1997) 5 SCC 394 and Bangalore Club vs. Commissioner of Income Tax and Another, (2013) 350 ITR 509 (SC)= (2013) 5 SCC 509.

13. We have considered the submissions on behalf of the parties.

14. The doctrine of mutuality, based on common law principles, is premised on the theory that a person cannot make a profit from himself. An amount received from oneself, therefore, cannot be regarded as income and taxable. Section 2(24) of the Income Tax Act defines taxable income. The income of a co­operative society from business is taxable under Section 2(24)(vii) and will stand excluded from the principle of mutuality. The essence of the principle of mutuality lies in the commonality of the contributors and the participants who are also the beneficiaries. The contributors to the common fund must be entitled to participate in the surplus and the participators in the surplus are contributors to the common fund. The law envisages a complete identity between the contributors and the participants in this sense. The principle postulates that what is returned is contributed by a member. Any surplus in the common fund shall therefore not constitute income but will only be an increase in the common fund meant to meet sudden eventualities. A common feature of mutual organizations in general can be stated to be that the participants usually do not have property rights to their share in the common fund, nor can they sell their share. Cessation from membership would result in the loss of right to participate without receiving a financial benefit from the cessation of the membership.

15. The doctrine of mutuality based on common law is predicated on the principles enunciated in Styles vs. New York Life Insurance Company, (1889) 2 T.C. 460, by Lord Watson in the House of Lords in the following words:

“When a number of individuals agree to contribute funds for a common purpose, such as the payment of annuities or of capital sums, to some or all of them, on the occurrence of events certain or uncertain, and stipulate that their contributions, so far as not required for that purpose, shall be repaid to them, I cannot conceive why they should b regarded as traders, or why contributions returned to them should be regarded as profits.”
16. In Bankipur Club Ltd. (supra), considering the surplus of receipts over expenditure generated from the facilities extended by a club to its members and its exemption from tax on principles of mutuality, it was observed :­ “20……..In all these cases, the appellate tribunal as also the High Court have found that the amounts received by the clubs were for supply of drinks, refreshments or other goods as also the letting out of building for rent or the amounts received by way of admission fees, periodical subscription etc. from the members of the clubs were only for/towards charges for the privileges, conveniences and amenities provided to the members, which they were entitled to as per the rules and regulations of the respective clubs. It has also been found that different clubs realised various sums on the above counts only to afford to their members the usual privileges, advantages, conveniences and accommodation. In other words, the services offered on the above counts were not done with any profit motive and were not tainted with commerciality. The facilities were offered only as a matter of convenience for the use of the members (and their friends, if any, availing of the facilities occasionally).

21. In the light of the above findings, it necessarily follows that the receipts for the various facilities extended by the clubs to their members, as stated hereinabove as part of the usual privileges, advantages and conveniences, attached to the membership of the club, cannot be said to be “a trading activity”. The surplus — excess of receipts over the expenditure as a result of mutual arrangement, cannot be said to be “income” for the purpose of the Act.”

17. In Bangalore Club (supra), after referring to Styles, the doctrine of mutuality was explained further as follows :­ “8………..The principle relates to the notion that a person cannot make a profit from himself. An amount received from oneself is not regarded as income and is therefore not subject to tax; only the income which comes within the definition of Section 2(24) of the Act is subject to tax [income from business involving the doctrine of mutuality is denied exemption only in special cases covered under clause (vii) of Section 2(24) of the Act]. The concept of mutuality has been extended to defined groups of people who contribute to a common fund, controlled by the group, for a common benefit. Any amount surplus to that needed to pursue the common purpose is said to be simply an increase of the common fund and as such neither considered income nor taxable…….. A common feature of mutual organisations in general and of licensed clubs in particular, is that participants usually do not have property rights to their share in the common fund, nor can they sell their share. And when they cease to be members, they lose their right to participate without receiving a financial benefit from the surrender of their membership……”

18. In The Commissioner of Income Tax vs. Common Effluent Treatment Plant, (Thane Belapur) Association, (2010) 328 ITR 362 (Bom), the assessee, an incorporated association under Section 25 of the Companies Act, 1956 comprising of industries operating in the Thane­Belapur region, was set up with a view to provide a centralised treatment facility for industrial effluents in view of the inability of each industrial unit to set up a separate effluent treatment facility. Chandrachud, J. (as he then was), speaking for the Division Bench, applying the principles of mutuality to the surplus so generated not being exigible to tax, held :­ “10. ….The income of the assessee is contributed by its members. The assessee has been formed specifically with the object of providing a common effluent facility to its members. The income is not generated out of dealings with any third party. The entire contribution originates in its members and is expended only in furtherance of the object of the Association for the benefit of the members. On these facts, both the Commissioner (Appeals) and the Tribunal were justified in coming to the conclusion that the surplus so generated falls within the purview of the doctrine of mutuality and was not exigible to tax….”

19. The proceedings in the present appeals relate to different assessment years based on information gathered by the Assessing Officer pursuant to notice under Section 133(6) of the Income Tax Act. Transfer charges are payable by the outgoing member. If for convenience, part of it is paid by the transferee, it would not partake the nature of profit or commerciality as the amount is appropriated only after the transferee is inducted as a member. In the event of non­ admission, the amount is returned. The moment the transferee is inducted as a member the principles of mutuality apply. Likewise, non­occupancy charges are levied by the society and is payable by a member who does not himself occupy the premises but lets it out to a third person. The charges are again utilised only for the common benefit of facilities and amenities to the members. Contribution to the common amenity fund taken from a member disposing property is similarly utilised for meeting sudden and regular heavy repairs to ensure continuous and proper hazard free maintenance of the properties of the society which ultimately enures to the enjoyment, benefit and safety of the members. These charges are levied on the basis of resolutions passed by the society and in consonance with its bye­laws. The receipts in the present cases have indisputably been used for mutual benefit towards maintenance of the premises, repairs, infrastructure and provision of common amenities.

20. Any difference in the contributions payable by old members and fresh inductees cannot fall foul of the law as sufficient classification exists. Membership forming a class, the identity of the individual member not being relevant, induction into membership automatically attracts the doctrine of mutuality. If a Society has surplus FSI available, it is entitled to utilise the same by making fresh construction in accordance with law. Naturally such additional construction would entail extra charges towards maintenance, infrastructure, common facilities and amenities. If the society first inducts new members who are required to contribute to the common fund for availing common facilities, and then grants only occupancy rights to them by draw of lots, the ownership remaining with the society, the receipts cannot be bifurcated into two segments of receipt and costs, so as to hold the former to be outside the purview of mutuality classifying it as income of the society with commerciality.

21. Section 79A of the Maharashtra Co­operative Societies Act reads as follows:

“79A. Government’s power to give directions in the public interest, etc.­ (1) If the State Government, on receipt of a report from the Registrar or otherwise, is satisfied that in the public interest or for the purposes of securing proper implementation of co­operative production and other development programmes approved or undertaken by Government, or to secure the proper management of the business of the Society generally, or for preventing the affairs of the Society being conducted in a manner detrimental to the interests of the members or of the depositors or the creditors thereof, it is necessary to issue directions to any class of societies generally or to any Society or societies in particular, the State Government may issue directions to them from time to time, and all societies or the societies concerned, as the case may be, shall be bound to comply with such directions.
(2) The State Government may modify or cancel any directions issued under subsection (1), and in modifying or cancelling such directions may impose such conditions as it may deem fit.

(3) Where the Registrar is satisfied that any person was responsible for complying with any directions or modified directions issued to a Society under sub­ sections (1) and (2) and he has failed without any good reason or justification, to comply with the directions, the Registrar may by order­­

(a) if the person is a member of the committee of the Society, remove the member from the Committee and appoint any other person as member of the committee for the remainder of the term of his office and declare him to be disqualified to be such member for a period of six years from the date of the order:

(b) if the person is an employee of the Society, direct the committee to remove such person from employment of the Society forthwith, and if any member or members of the committee, without any good reason or justification, fail to comply with this order, remove the members, appoint other persons as members and declare them disqualified as provided in clause (a) above: Provided that, before making any order under this sub­section, the Registrar shall give a reasonable opportunity of being heard to the person or persons concerned and consult the federal Society is affiliated. Any order made by the Registrar under this section shall be final.”

22. In The New India Co­operative Housing Society (supra), the challenge by the aggrieved was to the transfer fee levied by the society in excess of that specified in the notification, which is a completely different cause of action having no relevance to the present controversy. It is not the case of the Revenue that such receipts have not been utilised for the common benefit of those who have contributed to the funds.

23. The notification dated 09.08.2001 in the relevant extract reads as follows:­ ORDER In the exercise of the powers conferred upon the State Government under Section 79­A of the Maharashtra Co­operative Societies Act, 1960 following orders are hereby issued in the larger interests of the people in the State.

1) Xxxxxx

2) The rate of premium to be charged for the transfer Flat/Premises as well as the rights and share in the share capital/property of the Co­operative Housing Society by a member in favour of another, should be determined at the General Meeting of the Society.

24. We do not find any reason to take a view different from that taken by the High Court, that the notification dated 09.08.2001 is applicable only to co­operative housing societies and has no application to a premises society which consists of non­residential premises.

25. Kumbakonam (supra), is distinguishable on its own facts. The doctrine of mutuality was held to be inapplicable because the members who had not contributed to surplus as customers were nevertheless entitled to participate and receive part of the surplus. In Chelmsford Club (supra), it was held that there was no profit motive or sharing of profits as such amongst the members. The surplus, if any, from the business was not shared by the members but was used for providing better facilities to the members. There was a clear identity between the contributors and the participators to the fund and the recipients thereof.

26. In the result, all appeals preferred by the Revenue are dismissed. Civil Appeal No.1180 of 2015 preferred by the assessee society is allowed.

……………………………J.

(Rohinton Fali Nariman) ……………………………..J.

(Navin Sinha) New Delhi, March 12, 2018.

ITEM NO.1501 COURT NO.10 SECTION IX

S U P R E M E C O U R T O F I N D I A
RECORD OF PROCEEDINGS

C.A.No.2706/2018 @ SLP(C)No.30194/2010 (Arising out of impugned final judgment and order dated 11- 01-2010 in ITA No.680/2009 passed by the High Court Of Judicature At Bombay) INCOME TAX OFFICER,MUMBAI Petitioner(s) VERSUS VENKATESH PREMISES COOP.STY.LTD. Respondent(s) WITH C.A.No.3271/2012 (IX) C.A.No.3272/2012 (IX) C.A.No.3827/2012 (IX) C.A.No.1180/2015 (III) C.A.No.2997/2017 (III) C.A.No.8741/2017 (III) C.A.No.2708/2018 in SLP(C)No.32061/2010 (IX) C.A.No.2707/2018 in SLP(C)No.30195/2010 (IX) C.A.No.2713/2018 in SLP(C)No.32914/2010 (IX) C.A.No.2710/2018 in SLP(C)No.32913/2010 (IX) C.A.No.2709/2018 in SLP(C)No.32063/2010 (IX) C.A.No.2711/2018 in SLP(C)No.32065/2010 (IX) C.A.No.2712/2018 in SLP(C)No.34087/2010 (IX) C.A.No.2716/2018 in SLP(C)No.35120/2010 (IX) C.A.No.2714/2018 in SLP(C)No.32918/2010 (IX) C.A.No.2715/2018 in SLP(C)No.34061/2010 (IX) C.A.No.2717/2018 in SLP(C)No.128/2011 (IX) C.A.No.2728/2018 in SLP(C)No.16967/2011 (IX) C.A.No.2718/2018 in SLP(C)No.133/2011 (IX) C.A.No.2720/2018 in SLP(C)No.367/2011 (IX) C.A.No.2721/2018 in SLP(C)No.370/2011 (IX) C.A.No.2719/2018 in SLP(C)No.378/2011 (IX) C.A.No.2722/2018 in SLP(C)No.2623/2011 (IX) C.A.No.2724/2018 in SLP(C)No.2745/2011 (IX) C.A.No.2726/2018 in SLP(C)No.4096/2011 (IX) C.A.No.2723/2018 in SLP(C)No.2744/2011 (IX) C.A.No.2725/2018 in SLP(C)No.3283/2011 (IX) C.A.No.2727/2018 in SLP(C)No.5382/2011 (IX) C.A.No.2729/2018 in SLP(C)No.17102/2011 (IX) C.A.No.2730/2018 in SLP(C)No.17667/2011 (IX) C.A.No.2731/2018 in SLP(C)No.19992/2012 (IX) C.A.No.2732/2018 in SLP(C)No.19993/2012 (IX) C.A.No.2733/2018 in SLP(C)No.17428/2015 (IX) C.A.No.2734/2018 in SLP(C)No.29755/2013 (IX) C.A.No.2735/2018 in SLP(C)No.17430/2015 (IX) C.A.No.2736/2018 in SLP(C)No.17431/2015 (IX) C.A.No.2740/2018 in SLP(C)No.37702/2016 (IX) C.A.No.2739/2018 in SLP(C)No.36157/2016 (IX) C.A.No.2737/2018 in SLP(C)No.34865/2016 (IX) C.A.No.2738/2018 in SLP(C)No.34866/2016 (IX) C.A.No.2741/2018 in SLP(C)No.4122/2017 (IX) C.A.No.2742/2018 in SLP(C)No.4126/2017 (IX) C.A.No.2743/2018 in SLP(C)No.12234/2017 (IX) C.A.Nos.2766-2767/2018 @ SLP(C)Nos.6582-6583/2018 @ Diary No(s). 14603/2017 (IX) C.A.No.2747/2018 in SLP(C)No.19340/2017 (IX) C.A.No.2744/2018 in SLP(C)No.18935/2017 (IX) C.A.Nos.2768-2769/2018 @ SLP(C)Nos.6585-6586/2018 @ Diary No(s). 14672/2017 (IX) C.A.Nos.2771-2772/2018 @ SLP(C)Nos.6587-6588/2018 @ Diary No(s). 14675/2017 (IX) C.A.No.2770/2018 @ SLP(C)No.6589/2018 @ Diary No(s).14674/2017 (IX) C.A.No.2746/2018 in SLP(C)No.18944/2017 (IX) C.A.No.2745/2018 in SLP(C)No.18943/2017 (IX) C.A.No.2765/2018 @ SLP(C)No.6550/2018 @ Diary No(s).18867/2017 (IX) Date : 12-03-2018 These petitions were called on for pronouncement of judgment today.

For Petitioner(s) Mrs. Anil Katiyar,AOR Mr. B.V. Balaram Das,AOR Mr. Shiv Kumar Suri,Aor Mr. Shikhil Suri,Adv.

Mr. Saswat Pattnaik,Adv.

For Respondent(s) Mr. Salil Kapoor,Adv.

Mr. Sanat Kapoor,Adv.

Mr. Sumit Lalchandani,Adv.

Ms. Soumya Singh,Adv.

Ms. Ananya Kapoor,Adv.

Mr. Kislaya Parashar,Adv.

Mr. Rajeev Sharma,Adv.

Mr. Deepak Goel,Adv.

Mr. Firasat Ali Siddiqi,Adv.

Mr. A.D. Kumar,Adv.

Mr. Anil Kr. Chopra,Adv.

Mr. Siddhartha Chowdhury,AOR Ms. Nandini Gore,Adv.

Ms. Sonia Nigam,Adv.

Mr. Mandeep Kalra,Adv.

Ms. Manik Karanjawala,Adv.

For M/s. Karanjawala & Co.,AOR Mr. Pratap Venugopal,Adv.

Ms. Surekha Raman,Adv.

Ms. Niharika,Adv.

Ms. Kanika Kalaiyarasan,Adv.

For M/s. K.J. John & Co.,AOR Mr. S. C. Birla,AOR Mr. Kamal Mohan Gupta,AOR Mrs. Shally Bhasin,AOR Mr. Nikhil Nayyar,AOR Mr. Rashmikumar Manilal Vithlani,AOR Mr. V.N. Raghupathy,AOR Mrs. V.D. Khanna,AOR Mr. Senthil Jagadeesan,AOR Hon’ble Mr. Justice Navin Sinha pronounced the Reportable judgment of the Bench comprising Hon’ble Mr. Justice Rohinton Fali Nariman and His Lordship.

Delay condoned.

Leave granted in all the SLPs.

The appeals preferred by the Revenue are dismissed and Civil Appeal No.1180/2015 preferred by the assessee-society is allowed in terms of the signed Reportable judgment.

Pending application, if any, stands disposed of.

(Sarita Purohit) (Suman Jain)
Court Master Branch Officer

(Signed Reportable judgment is placed on the file)

Supreme Court judgement in Danamma vs. Amar On HUF Rights Of Daughters

MASTI

In DANAMMA @ SUMAN SURPUR VERSUS AMAR, the Supreme Court has decided the issue whether married daughters can be said to be the coparceners in the Hindu Undivided Family (HUF) as they were born prior to the enactment of Hindu Succession Act, 1956.

In the Supreme Court has held that a fundamental change has been brought forward in the Hindu Succession Act, 1956 by amending it in 2005.

The Court noted in the judgement dated 01.02.2018 that Section 6, as amended, stipulates that on and from the commencement of the amended Act, 2005, the daughter of a coparcener shall by birth become a coparcener in her own right in the same manner as the son.

It is held in the judgement that the status conferred upon sons under the old section and the old Hindu Law was to treat them as coparceners since birth.

The Supreme Court has held in the judgement that the amended provision now statutorily recognizes the rights of coparceners of daughters as well since birth.

Section 6 of the Hindu Succession Act, 1956 uses the words in the same manner as the son. It should therefore be apparent that both the sons and the daughters of a coparcener have been conferred the right of becoming coparceners by birth.

It is the very factum of birth in a coparcenary that creates the coparcenary, therefore the sons and daughters of a coparcener become coparceners by virtue of birth.

The Supreme Court further held that devolution of coparcenary property is the later stage of and a consequence of death of a coparcener. The first stage of a coparcenary is obviously its creation as explained above, and as is well recognized.

It explained that one of the incidents of coparcenary is the right of a coparcener to seek a severance of status. Hence, the rights of coparceners emanate and flow from birth (now including daughters) as is evident from sub-s (1)(a) and (b).

Text of Supreme Court’s judgement in DANAMMA @ SUMAN SURPUR vs. Amar

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS. 188-189 OF 2018
[@SLP(C) Nos. 10638-10639 of 2013]

DANAMMA @ SUMAN SURPUR & ANR. …..APPELLANT(S)

VERSUS

AMAR & ORS. …..RESPONDENT(S)

JUDGMENT
A.K. SIKRI, J.

The appellants herein, two in number, are the daughters of one, Gurulingappa Savadi, propositus of a Hindu Joint Family. Apart from these two daughters, he had two sons, namely, Arunkumar and Vijay. Gurulingappa Savadi died in the year 2001 leaving behind the aforesaid two daughters, two sons and his widow, Sumitra. After his death, Amar, S/o Arunkumar filed the suit for partition and a separate possession of the suit property described at Schedule B to E in the plaint stating that the two sons and widow were in joint possession of the aforesaid properties as coparceners and properties mentioned in Schedule B was acquired out of the joint family nucleus in the name of Savadi. Case set up by him was that the appellants herein were not the coparceners in the said joint family as they were born prior to the enactment of Hindu Succession Act, 1956 (hereinafter referred to as the ‘Act’). It was also pleaded that they were married daughters and at the time of their marriage they had received gold and money and had, hence, relinquished their share.

2) The appellants herein contested the suit by claiming that they were also entitled to share in the joint family properties, being daughters of Gurulingappa Savadi and for the reason that he had died after coming into force the Act of 1950.

3) The trial court, while decreeing the suit held that the appellants were not entitled to any share as they were born prior to the enactment of the Act and, therefore, could not be considered as coparceners. The trial court also rejected the alternate contention that the appellants had acquired share in the said properties, in any case, after the amendment in the Act vide amendment Act of 2005. This view of the trial court has been upheld by the High Court in the impugned judgement dated January 25, 2012 thereby confirming the decree dated August 09, 2007 passed in the suit filed for partition.

4) In the aforesaid backdrop, the question of law which arises for consideration in this appeal is as to whether, the appellants, daughters of Gurulingappa Savadi, could be denied their share on the ground that they were born prior to the enactment of the Act and, therefore, cannot be treated as coparceners? Alternate question is as to whether, with the passing of Hindu Succession (Amendment) Act, 2005, the appellants would become coparcener “by birth” in their “own right in the same manner as the son” and are, therefore, entitled to equal share as that of a son?

5) Though, we have mentioned the gist of the lis involved in this case along with brief factual background in which it has arisen, some more facts which may be necessary for understanding the genesis of issue involved may also be recapitulated. We may start with the genealogy of the parties, it is as under:

“ Guralingappa=Sumitra
(Def.8)

————————————————————— Mahandanda Arunkumar @ Arun=Sarojini Vijay Danamma (Def. 7) (Def.1) (dead) (Def.2) (Def.5) (Def. 6)

———————————————-

Sheetal Amar Triveni
(Def. 3) (Plff) (Def. 4) ”

6) Respondent No. 1 herein (the plaintiff) filed the suit on July 01, 2002 claiming 1/15th share in the suit schedule properties. In the said suit, he mentioned the properties which needed partition.

7) The plaint schedule C compromised of the house properties belonging to the joint family. The plaint schedule D comprised of the shop properties belonging to the joint family. The plaint schedule E comprised of the machineries and movable belonging to the joint family. The plaintiff averred that the plaint schedule properties belonged to the joint family and that defendant no. 1, the father of the plaintiff was neglecting the plaintiff and his siblings and sought partition of the suit schedule properties. The plaintiff contended that all the suit schedule properties were the joint family properties. The plaintiff contended in para 5 of the plaint that the propositus, Guralingappa died 1 year prior to the filing of the suit. In para 7 of the plaint, the plaintiff contended that defendant no. 1 had 1/3rd share and defendant no. 5 and 8 had 1/3 rd share each in the suit schedule properties. The plaintiff also contended that defendants 6 and 7 did not have any share in the suit schedule properties.

8) Defendant no. 1 (father of the plaintiff) and son of Guralingappa Savadi did not file any written statement. Defendant nos. 2, 3 and 4 filed their separate written statements supporting the claim of the plaintiff. Defendant no. 5 (respondent no. 5 herein and son of Guralingappa Savadi), however, contested the suit. He, inter alia, contended that after the death of Guralingappa, an oral partition took place between defendant no. 1, defendant no. 5 and others and in the said partition, defendant no. 1 was allotted certain properties and defendant no. 5 was allotted certain other properties and defendant no. 8, Sumitra, wife of Guralingappa Savadi was allotted certain other properties. Defendant no. 5 further contended that defendant nos. 6 and 7 were not allotted any properties in the said alleged oral partition.

9) Defendant no. 5 further contended that one of the properties, namely, C.T.S. No. 774 and also certain other properties were not joint family properties.

10) The appellants claimed that they were also entitled to their share in the property. After framing the issues and recording the evidence, the trial court by its judgment and decree dated August 09, 2007 held that the suit schedule properties were joint family properties except CTS No. 774 (one of the house properties in plaint C schedule).

11) The trial court held that the plaintiff, defendant nos. 2 to 4 were entitled to 1/8th share in the joint family properties. The trial court further noted that defendant no. 8 (wife of Gurulingappa Savadi) died during the pendency of the suit intestate and her share devolved in favour of defendants no. 1 and 5 only and, therefore, defendant nos. 1 and 2 were entitled to ½ share in the said share. The trial court passed the following order:

“The suit of the plaintiff is decreed holding that the plaintiff is entitled for partition and separate possession of his 1/8th share in the suit ‘B’, ‘C’ and ‘D’ schedule properties (except CTS No. 774) and also in respect of the Machinery’s stated in the report of the commissioner. The commissioners report Ex. P16 which contains the list of machinery’s to form part of the decree.
The defendants 2 to 4 are each entitled to a/8th share and the 5th defendant is entitled for 4/8 share in the above said properties.”

12) The trial court, thus, denied any share to the appellants.

13) Aggrieved by the said judgment and decree of the trial court, the defendant nos. 6 and 7 filed an appeal bearing R.F.A. No. 322 of 2008 before the High Court seeking equal share as that of the sons of the propositus, namely, defendant nos. 1 and 5.

14) The High Court by its impugned judgment and order dated January 25, 2012 dismissed the appeal. Thereafter, on March 04, 2012 defendant nos. 6 and 7 filed a review petition bearing no. 1533 of 2012 before the High Court, which met the same fate.

15) We have heard the learned counsel for the parties. Whereas, the learned counsel for the appellants reiterated his submissions which were made before the High Court as well and noted above, learned counsel for the respondents refuted those submissions by relying upon the reason given by the High Court in the impugned judgment.

16) In the first instance, let us take note of the provisions of Section 6 of the Act, as it stood prior to its amendment by the Amendment Act, 2005. This provision reads as under:

“6. Devolution of interest in coparcenary property.—When a male Hindu dies after the commencement of this Act, having at the time of his death an interest in a Mitakshara coparcenary property, his interest in the property shall devolve by survivorship upon the surviving members of the coparcenary and not in accordance with this Act:

Provided that, if the deceased had left him surviving a female relative specified in Class I of the Schedule or a male relative specified in that class who claims through such female relative, the interest of the deceased in the Mitakshara coparcenary property shall devolve by testamentary or intestate succession, as the case may be, under this Act and not by survivorship.

Explanation 1.—For the purposes of this section, the interest of a Hindu Mitakshara coparcener shall be deemed to be the share in the property that would have been allotted to him if a partition of the property had taken place immediately before his death, irrespective of whether he was entitled to claim partition or not.
Explanation 2.—Nothing contained in the proviso to this section shall be construed as enabling a person who had separated himself from the coparcenary before the death of the deceased or any of his heirs to claim on intestacy a share in the interest referred to therein.”

17) No doubt, Explanation 1 to the aforesaid Section states that the interest of the deceased Mitakshara coparcenary property shall be deemed to be the share in the property that would have been allotted to him if the partition of the property had taken place immediately before his death, irrespective whether he was entitled to claim partition or not. This Explanation came up for interpretation before this Court in Anar Devi & Ors. v. Parmeshwari Devi & Ors.1. The Court quoted, with approval, the following passage from the authoritative treatise of Mulla, Principles of Hindu Law, 17th Edn., Vol. II, p. 250 wherein the learned 1 (2006) 8 SCC 656 author made following remarks while interpreting Explanation 1 to Section 6:

“…Explanation 1 defines the expression ‘the interest of the deceased in Mitakshara coparcenary property’ and incorporates into the subject the concept of a notional partition. It is essential to note that this notional partition is for the purpose of enabling succession to and computation of an interest, which was otherwise liable to devolve by survivorship and for the ascertainment of the shares in that interest of the relatives mentioned in Class I of the Schedule. Subject to such carving out of the interest of the deceased coparcener the other incidents of the coparcenary are left undisturbed and the coparcenary can continue without disruption. A statutory fiction which treats an imaginary state of affairs as real requires that the consequences and incidents of the putative state of affairs must flow from or accompany it as if the putative state of affairs had in fact existed and effect must be given to the inevitable corollaries of that state of affairs.”

7. The learned author further stated that:

“[T]he operation of the notional partition and its inevitable corollaries and incidents is to be only for the purposes of this section, namely, devolution of interest of the deceased in coparcenary property and would not bring about total disruption of the coparcenary as if there had in fact been a regular partition and severance of status among all the surviving coparceners.”
8. According to the learned author, at pp. 253-54, the undivided interest “of the deceased coparcener for the purpose of giving effect to the rule laid down in the proviso, as already pointed out, is to be ascertained on the footing of a notional partition as of the date of his death. The determination of that share must depend on the number of persons who would have been entitled to a share in the coparcenary property if a partition had in fact taken place immediately before his death and such person would have to be ascertained according to the law of joint family and partition. The rules of Hindu law on the subject in force at the time of the death of the coparcener must, therefore, govern the question of ascertainment of the persons who would have been entitled to a share on the notional partition”.

18) Thereafter the Court spelled out the manner in which the statutory fiction is to be construed by referring to certain judgments and summed up the position as follows:

“11. Thus we hold that according to Section 6 of the Act when a coparcener dies leaving behind any female relative specified in Class I of the Schedule to the Act or male relative specified in that class claiming through such female relative, his undivided interest in the Mitakshara coparcenary property would not devolve upon the surviving coparcener, by survivorship but upon his heirs by intestate succession. Explanation 1 to Section 6 of the Act provides a mechanism under which undivided interest of a deceased coparcener can be ascertained and i.e. that the interest of a Hindu Mitakshara coparcener shall be deemed to be the share in the property that would have been allotted to him if a partition of the property had taken place immediately before his death, irrespective of whether he was entitled to claim partition or not.

It means for the purposes of finding out undivided interest of a deceased coparcener, a notional partition has to be assumed immediately before his death and the same shall devolve upon his heirs by succession which would obviously include the surviving coparcener who, apart from the devolution of the undivided interest of the deceased upon him by succession, would also be entitled to claim his undivided interest in the coparcenary property which he could have got in notional partition.”

19) This case clearly negates the view taken by the High Court in the impugned judgment.

20) That apart, we are of the view that amendment to the aforesaid Section vide Amendment Act, 2005 clinches the issue, beyond any pale of doubt, in favour of the appellants. This amendment now confers upon the daughter of the coparcener as well the status of coparcener in her own right in the same manner as the son and gives same rights and liabilities in the coparcener properties as she would have had if it had been son. The amended provision reads as under:

“6. Devolution of interest in coparcenary property.―(1) On and from the commencement of the Hindu Succession (Amendment) Act, 2005 (39 of 2005), in a Joint Hindu family governed by the Mitakshara law, the daughter of a coparcener shall,―

(a) by birth become a coparcener in her own right the same manner as the son;

(b) have the same rights in the coparcenery property as she would have had if she had been a son;

(c) be subject to the same liabilities in respect of the said coparcenery property as that of a son, and any reference to a Hindu Mitakshara coparcener shall be deemed to include a reference to a daughter of a coparcener:

Provided that nothing contained in this sub-section shall affect or invalidate any disposition or alienation including any partition or testamentary disposition of property which had taken place before the 20th day of December, 2004.

(2) Any property to which a female Hindu becomes entitled by virtue of sub-section (1) shall be held by her with the incidents of coparcenary ownership and shall be regarded, notwithstanding anything contained in this Act or any other law for the time being in force, as property capable of being disposed of by her by testamentary disposition.

(3) Where a Hindu dies after the commencement of the Hindu Succession (Amendment) Act, 2005 (39 of 2005), his interest in the property of a Joint Hindu family governed by the Mitakshara law, shall devolve by testamentary or intestate succession, as the case may be, under this Act and not by survivorship, and the coparcenery property shall be deemed to have been divided as if a partition had taken place and,―

(a) the daughter is allotted the same share as is allotted to a son;

(b) the share of the pre-deceased son or a pre-deceased daughter, as they would have got had they been alive at the time of partition, shall be allotted to the surviving child of such pre-deceased son or of such pre-deceased daughter; and

(c) the share of the pre-deceased child of a pre-deceased son or of a pre-deceased daughter, as such child would have got had he or she been alive at the time of the partition, shall be allotted to the child of such pre-deceased child of the pre-deceased son or a pre-deceased daughter, as the case may be.

Explanation.―For the purposes of this sub-section, the interest of a Hindu Mitakshara coparcener shall be deemed to be the share in the property that would have been allotted to him if a partition of the property had taken place immediately before his death, irrespective of whether he was entitled to claim partition or not.

(4) After the commencement of the Hindu Succession (Amendment) Act, 2005 (39 of 2005), no court shall recognise any right to proceed against a son, grandson or great-grandson for the recovery of any debt due from his father, grandfather or great-grandfather solely on the ground of the pious obligation under the Hindu law, of such son, grandson or great-grandson to discharge any such debt:

Provided that in the case of any debt contracted before the commencement of the Hindu Succession (Amendment) Act, 2005 (39 of 2005), nothing contained in this sub-section shall affect―

(a) the right of any creditor to proceed against the son, grandson or great-grandson, as the case may be; or

(b) any alienation made in respect of or in satisfaction of, any such debt, and any such right or alienation shall be enforceable under the rule of pious obligation in the same manner and to the same extent as it would have been enforceable as if the Hindu Succession (Amendment) Act, 2005 (39 of 2005) had not been enacted.

Explanation.―For the purposes of clause (a), the expression “son”, “grandson” or “great-grandson” shall be deemed to refer to the son, grandson or great-grandson, as the case may be, who was born or adopted prior to the commencement of the Hindu Succession (Amendment) Act, 2005 (39 of 2005).

(5) Nothing contained in this section shall apply to a partition, which has been effected before the 20th day of December, 2004.

Explanation.―For the purposes of this section “partition” means any partition made by execution of a deed of partition duly registered under the Registration Act, 1908 (16 of 1908) or partition effected by a decree of a court.]”

21) The effect of this amendment has been the subject matter of pronouncements by various High Courts, in particular, the issue as to whether the right would be conferred only upon the daughters who are born after September 9, 2005 when Act came into force or even to those daughters who were born earlier.

Bombay High Court in Vaishali Satish Gonarkar v. Satish Keshorao Gonarkar2 had taken the view that the provision cannot be made applicable to all daughters born even prior to the amendment, when the Legislature itself specified the posterior date from which the Act would come into force.

This view was contrary to the view taken by the same High Court in Sadashiv Sakharam Patil v. Chandrakant Gopal Desale3. Matter was referred to the Full Bench and the judgment of the Full Bench is reported as Badrinarayan Shankar Bhandari v. Omprakash Shankar Bhandari4.

The Full Bench held that clause (a) of sub-section (1) of Section 6 would be prospective in operation whereas clause (b) and (c) and other parts of sub-section (1) as well as sub-section (2) would be retroactive in operation. It held that amended Section 6 applied to daughters born 2 AIR 2012 Bom 110 3 2011 (5) Bom CR 726 4 AIR 2014 Bom 151 prior to June 17, 1956 (the date on which Hindu Succession Act came into force) or thereafter (between June 17, 1956 and September 8, 2005) provided they are alive on September 9, 2005 i.e. on the date when Amended Act, 2005 came into force. Orissa, Karnataka and Delhi High Court have also held to the same effect 5.

22) The controversy now stands settled with the authoritative pronouncement in the case of Prakash & Ors. v. Phulavati & Ors.6 which has approved the view taken by the aforesaid High Courts as well as Full Bench of the Bombay High Court. Following discussion from the said judgment is relevant:

“17. The text of the amendment itself clearly provides that the right conferred on a “daughter of a coparcener” is “on and from the commencement of the Hindu Succession (Amendment) Act, 2005”. Section 6(3) talks of death after the amendment for its applicability. In view of plain language of the statute, there is no scope for a different interpretation than the one suggested by the text of the amendment. An amendment of a substantive provision is always prospective unless either expressly or by necessary intendment it is retrospective. [Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24, paras 22 to 27]

In the present case, there is neither any express provision for giving retrospective effect to the amended provision nor necessary intendment to that effect. Requirement of partition being registered can have no application to statutory notional partition on opening of succession as per unamended provision, having regard to nature of such partition which is by operation of law.

The intent and effect of the amendment will be considered a little later. On this finding, the view of the High Court cannot be sustained.

18. The contention of the respondents that the amendment 5 AIR 2008 Ori 133: Pravat Chandra Pattnaik v. Sarat Chandra Pattnaik; ILR 2007 Kar 4790: Sugalabai v. Gundappa A. Maradi and 197 (2013) DLT 154: Rakhi Gupta v. Zahoor Ahmad 6 (2016) 2 SCC 36 should be read as retrospective being a piece of social legislation cannot be accepted.

Even a social legislation cannot be given retrospective effect unless so provided for or so intended by the legislature. In the present case, the legislature has expressly made the amendment applicable on and from its commencement and only if death of the coparcener in question is after the amendment.

Thus, no other interpretation is possible in view of the express language of the statute. The proviso keeping dispositions or alienations or partitions prior to 20-12-2004 unaffected can also not lead to the inference that the daughter could be a coparcener prior to the commencement of the Act.

The proviso only means that the transactions not covered thereby will not affect the extent of coparcenary property which may be available when the main provision is applicable. Similarly, Explanation has to be read harmoniously with the substantive provision of Section 6(5) by being limited to a transaction of partition effected after 20-12-2004. Notional partition, by its very nature, is not covered either under the proviso or under sub-section (5) or under the Explanation.

19. Interpretation of a provision depends on the text and the context. [RBI v. Peerless General Finance & Investment Co. Ltd., (1987) 1 SCC 424, p. 450, para 33] Normal rule is to read the words of a statute in ordinary sense.

In case of ambiguity, rational meaning has to be given. [Kehar Singh v. State (Delhi Admn.), (1988) 3 SCC 609 : 1988 SCC (Cri) 711] In case of apparent conflict, harmonious meaning to advance the object and intention of legislature has to be given. [District Mining Officerv. TISCO, (2001) 7 SCC 358]

20. There have been number of occasions when a proviso or an explanation came up for interpretation. Depending on the text, context and the purpose, different rules of interpretation have been applied. [S. Sundaram Pillai v. V.R. Pattabiraman, (1985) 1 SCC 591]

21. Normal rule is that a proviso excepts something out of the enactment which would otherwise be within the purview of the enactment but if the text, context or purpose so require a different rule may apply. Similarly, an explanation is to explain the meaning of words of the section but if the language or purpose so require, the explanation can be so interpreted. Rules of interpretation of statutes are useful servants but difficult masters. [Keshavji Ravji & Co. v. CIT, (1990) 2 SCC 231 : 1990 SCC (Tax) 268] Object of interpretation is to discover the intention of legislature.

22. In this background, we find that the proviso to Section 6(1) and sub-section (5) of Section 6 clearly intend to exclude the transactions referred to therein which may have taken place prior to 20-12-2004 on which date the Bill was introduced.

Explanation cannot permit reopening of partitions which were valid when effected. Object of giving finality to transactions prior to 20-12-2004 is not to make the main provision retrospective in any manner. The object is that by fake transactions available property at the introduction of the Bill is not taken away and remains available as and when right conferred by the statute becomes available and is to be enforced.

Main provision of the amendment in Sections 6(1) and (3) is not in any manner intended to be affected but strengthened in this way. Settled principles governing such transactions relied upon by the appellants are not intended to be done away with for period prior to 20-12-2004. In no case statutory notional partition even after 20-12-2004 could be covered by the Explanation or the proviso in question.

23. Accordingly, we hold that the rights under the amendment are applicable to living daughters of living coparceners as on 9-9-2005 irrespective of when such daughters are born. Disposition or alienation including partitions which may have taken place before 20-12-2004 as per law applicable prior to the said date will remain unaffected. Any transaction of partition effected thereafter will be governed by the Explanation.”

23) The law relating to a joint Hindu family governed by the Mitakshara law has undergone unprecedented changes. The said changes have been brought forward to address the growing need to merit equal treatment to the nearest female relatives, namely daughters of a coparcener.

The section stipulates that a daughter would be a coparcener from her birth, and would have the same rights and liabilities as that of a son. The daughter would hold property to which she is entitled as a coparcenary property, which would be construed as property being capable of being disposed of by her either by a will or any other testamentary disposition.

These changes have been sought to be made on the touchstone of equality, thus seeking to remove the perceived disability and prejudice to which a daughter was subjected.

The fundamental changes brought forward about in the Hindu Succession Act, 1956 by amending it in 2005, are perhaps a realization of the immortal words of Roscoe Pound as appearing in his celebrated treaties, The Ideal Element in Law, that “the law must be stable and yet it cannot stand still. Hence all thinking about law has struggled to reconcile the conflicting demands of the need of stability and the need of change.”

24) Section 6, as amended, stipulates that on and from the commencement of the amended Act, 2005, the daughter of a coparcener shall by birth become a coparcener in her own right in the same manner as the son. It is apparent that the status conferred upon sons under the old section and the old Hindu Law was to treat them as coparceners since birth.

The amended provision now statutorily recognizes the rights of coparceners of daughters as well since birth. The section uses the words in the same manner as the son. It should therefore be apparent that both the sons and the daughters of a coparcener have been conferred the right of becoming coparceners by birth. It is the very factum of birth in a coparcenary that creates the coparcenary, therefore the sons and daughters of a coparcener become coparceners by virtue of birth.

Devolution of coparcenary property is the later stage of and a consequence of death of a coparcener. The first stage of a coparcenary is obviously its creation as explained above, and as is well recognized. One of the incidents of coparcenary is the right of a coparcener to seek a severance of status. Hence, the rights of coparceners emanate and flow from birth (now including daughters) as is evident from sub-s (1)(a) and (b).

25) Reference to the decision of this Court, in the case of State Bank of India v. Ghamandi Ram7 in essential to understand the incidents of coparceneryship as was always inherited in a Hindu Mitakshara coparcenary:

“According to the Mitakshara School of Hindu Law all the property of a Hindu joint family is held in collective ownership by all the coparceners in a quasi-corporate capacity. The textual authority of the Mitakshara lays down in express terms that the joint family property is held in trust for the joint family members then living and thereafter to be born (See Mitakshara, Ch. I. 1-27).

The incidents of coparcenership under the Mitakshara law are: first, the lineal male descendants of a person up to the third generation, acquire on birth ownership in the ancestral properties is common;

secondly, that such descendants can at any time work out their rights by asking for partition; thirdly, that till partition each member has got ownership extending over the entire property, conjointly with the rest; fourthly, that as a result of such co-ownership the possession and enjoyment of the properties is common; fifthly, that no alienation of the property is possible unless it be for necessity, without the concurrence of the coparceners, and sixthly, that the interest of a deceased member lapses on his death to the survivors.”

26) Hence, it is clear that the right to partition has not been abrogated.

7 AIR 1969 SC 1330.

The right is inherent and can be availed of by any coparcener, now even a daughter who is a coparcener.

27) In the present case, no doubt, suit for partition was filed in the year 2002. However, during the pendency of this suit, Section 6 of the Act was amended as the decree was passed by the trial court only in the year 2007.

Thus, the rights of the appellants got crystallised in the year 2005 and this event should have been kept in mind by the trial court as well as by the High Court.

This Court in Ganduri Koteshwaramma & Anr. v. Chakiri Yanadi & Anr.8 held that the rights of daughters in coparcenary property as per the amended S. 6 are not lost merely because a preliminary decree has been passed in a partition suit.

So far as partition suits are concerned, the partition becomes final only on the passing of a final decree. Where such situation arises, the preliminary decree would have to be amended taking into account the change in the law by the amendment of 2005.

28) On facts, there is no dispute that the property which was the subject matter of partition suit belongs to joint family and Gurulingappa Savadi was propositus of the said joint family property. In view of our aforesaid discussion, in the said partition suit, share will devolve upon the appellants as well.

Since, Savadi died leaving behind two sons, two daughters and a widow, both the appellants would be entitled to 1/5 th 8 (2011) 9 SCC 788 share each in the said property. Plaintiff (respondent No.1) is son of Arun Kumar (defendant No.1).

Since, Arun Kumar will have 1/5 th share, it would be divided into five shares on partition i.e. between defendant No.1 Arun Kumar, his wife defendant No.2, his two daughters defendant Nos.3 and 4 and son/plaintiff (respondent No.1). In this manner, the plaintiff/respondent No.1 would be entitled to 1/25 th share in the property.

29) The appeals are allowed in the aforesaid terms and decree of partition shall be drawn by the trial court accordingly.

No order as to costs.

………………………………………J.

(A.K. SIKRI) ………………………………………J.

(ASHOK BHUSHAN) NEW DELHI;

FEBRUARY 1, 2018.

Deadline for linking Aadhaar Extended By Supreme Court

MASTI

The Supreme Court passed an order on 13th March 2018 extended the deadline for linking Aadhaar cards to services, such as bank accounts and mobile phone connections, from March 31 till it decides on petitions challenging the Constitutional validity of The Aadhaar (Targeted Delivery of Financial and other Subsidies, Benefits and Services) Act, 2016.

This was ordered by a five-judge Constitution bench headed by Chief Justice of India Dipak Misra and including Justices A K Sikri, A M Khanwilkar, D Y Chandrachud and Ashok Bhushan.

The Supreme stated that that its interim order of December 15, 2017, fixing the March deadline, “shall stand extended till the matter is finally heard and the judgment is pronounced”.

It was made clear in the Supreme Court’s order that the direction shall also apply to the Tatkal passport scheme for which Aadhaar had been mandated.

In other words, the Passports (1st Amendment) Rules, 2018 will also be eligible for the aadhaar deadline extension.

However, the extension will not disturb the disbursement of subsidies under Section 7 of the Aadhaar Act.

Section 7 of the Aadhaar Act states: “…the Central Government or, as the case may be, the State Government may, for the purpose of establishing identity of an individual as a condition for receipt of a subsidy, benefit or service for which the expenditure is incurred from, or the receipt therefrom forms part of, the Consolidated Fund of India, require that such individual undergo authentication, or furnish proof of possession of Aadhaar number or in the case of an individual to whom no Aadhaar number has been assigned, such individual makes an application for enrolment:

Provided that if an Aadhaar number is not assigned to an individual, the individual shall be offered alternate and viable means of identification for delivery of the subsidy, benefit or service.”

The Government said the Centre was prepared for the extension when the deadline ends by March-end.

The Supreme Court’s order also made it clear that the guidelines contained in the December order, allowing those who did not have Aadhaar cards yet to furnish the number of their Aadhaar applications for opening bank accounts, will continue to operate.

The interim order of the Supreme Court had stated that the extension would cover “the schemes of the Ministries/Departments of the Union government to all state governments in similar terms”. This will also remain in force.

Aadhaar Linking Deadline Extended Indefinitely By Supreme Court

Supreme Court Judgement On Right Of foreign law firms/lawyers To Practice In India

MASTI

The latest judgement of the Supreme Court in BAR COUNCIL OF INDIA VERSUS A.K. BALAJI AND ORS answers the question whether foreign law firms/lawyers are permitted to practice in India.

The judgement of the Supreme Court is dated 13th March 2018 and is authored by ADARSH KUMAR GOEL, J and UDAY UMESH LALIT J.

The question considered in the said judgement of the Supreme Court is whether Foreign law firms or foreign lawyers cannot practice the profession of law in India either on the litigation or non-litigation side, unless they fulfil the requirement of the Advocates Act, 1961 and the Bar Council of India Rules as by the Judgment of Madras High Court dated 21st February, 2012 in A.K. Balaji versus The Government of India1. Civil Appeal No.8028 of 2015 and the judgment of Bombay High Court dated 16th December, 2009 in Lawyers Collective versus Bar Council of India2.

The Supreme Court upheld the view of the Bombay High Court and Madras High Court to the effect that foreign law firms/companies or foreign lawyers cannot practice profession of law in India either in the litigation or in nonlitigation side.

However, the Supreme Court modified the direction of the Madras High Court that there was no bar for the foreign law firms or foreign lawyers to visit India for a temporary period on a “fly in and fly out” basis for the purpose of giving legal advice to their clients in India regarding foreign law or their own system of law and on diverse international legal issues.

It was held by the Supreme Court that the expression “fly in and fly out” will only cover a casual visit not amounting to “practice”. In case of a dispute whether a foreign lawyer was limiting himself to “fly in and fly out” on casual basis for the purpose of giving legal advice to their clients in India regarding foreign law or their own system of law and on diverse international legal issues or whether in substance he was doing practice which is prohibited can be determined by the Bar Council of India.

The Supreme Court made it clear that the Bar Council of India or Union of India will be at liberty to make appropriate Rules in this regard including extending Code of Ethics being applicable even to such cases.

Download pdf copy of Supreme Court judgement BAR COUNCIL OF INDIA VERSUS A.K. BALAJI AND ORS dated 13th March 2018

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS.7875-7879 OF 2015

BAR COUNCIL OF INDIA …APPELLANT

VERSUS

A.K. BALAJI AND ORS. …RESPONDENTS

WITH

CIVIL APPEAL NO.7170 OF 2015

(Association of Indian Lawyers versus M/s. London Court of International Arbitration (LCIA) and ors.)

AND

CIVIL APPEAL NO. 8028 OF 2015

(Global Indian Lawyers versus Bar Council of India & Ors.)

J U D G M E N T

ADARSH KUMAR GOEL, J

1. The issue involved in this batch of matters is whether foreign law firms/lawyers are permitted to practice in India. Reference needs to be made to two leading matters. Civil Appeal Nos.7875-79 of 2015 have been filed by the Bar Council of India against the Judgment of Madras High Court dated 21st February, 2012 in A.K. Balaji versus The Government of India1. Civil Appeal No.8028 of 2015 has been filed by Global Indian Lawyers against the judgment of Bombay High Court dated 16th December, 2009 in Lawyers Collective versus Bar Council of India2.

1 AIR 2012 Mad 124

2 2010 (2) Mah LJ 726

2. The Madras High Court held as follows:

“63. After giving our anxious consideration to the matter, both on facts and on law, we come to the following conclusion :-

(i) Foreign law firms or foreign lawyers cannot practice the profession of law in India either on the litigation or non-litigation side, unless they fulfil the requirement of the Advocates Act, 1961 and the Bar Council of India Rules.

(ii) However, there is no bar either in the Act or the Rules for the foreign law firms or foreign lawyers to visit India for a temporary period on a “fly in and fly out” basis, for the purpose of giving legal advise to their clients in India regarding foreign law or their own system of law and on diverse international legal issues.

(iii) Moreover, having regard to the aim and object of the International Commercial Arbitration introduced in the Arbitration and Conciliation Act, 1996, foreign lawyers cannot be debarred to come to India and conduct arbitration proceedings in respect of disputes arising out of a contract relating to international commercial arbitration.

(iv) The B.P.O. Companies providing wide range of customised and integrated services and functions to its customers like word-processing, secretarial support, transcription services, proof-reading services, travel desk support services, etc. do not come within the purview of the Advocates Act, 1961 or the Bar Council of India Rules. However, in the event of any complaint made against these B.P.O. Companies violating the provisions of the Act, the Bar Council of India may take appropriate action against such erring companies.”

3. The Bombay High Court, on the other hand, concluded as follows:

“60. For all the aforesaid reasons, we hold that in the facts of the present case, the RBI was not justified in granting permission to the foreign law firms to open liaison offices in India under Section 29 of the 1973 Act. We further hold that the expressions ‘ to practise the profession of law’ in Section 29 of the 1961 Act is wide enough to cover the persons practising in litigious matters as well as persons practising in non litigious matters and, therefore, to practise in non litigious matters in India, the respondent Nos. 12 to 14 were bound to follow the provisions contained in the 1961 Act. The petition is disposed of accordingly with no order as to costs.”

4. When the matter against the judgment of the Madras High Court came up for hearing before this Court on 4th July, 2012, following interim order was passed :

“In the meanwhile, it is clarified that Reserve Bank of India shall not grant any permission to the foreign law firms to open liaison offices in India under Section 29 of the Foreign Exchange Regulation Act, 1973. It is also clarified that the expression “to practice the profession of law” under Section 29 of the Advocates Act, 1961 covers the persons practicing litigious matters as well as non-litigious matters other than contemplated in para 63(ii) of the impugned order and, therefore, to practice in non-litigious matters in India the foreign law firms, by whatever name called or described, shall be bound to follow the provisions contained in the Advocates Act, 1961.”

The said order has thereafter continued and is still in force.

5. In Civil Appeal Nos.7875-7879 of 2015, writ petition was filed before the Madras High Court by one A.K. Balaji, Advocate. Apart from official respondents, 32 law firms of U.K., U.S.A., France and Australia have been impleaded as respondents 9 to 40. Prayer in the writ petition is to take action against the original respondents 9 to 40 or any other foreign law firms or foreign lawyers illegally practicing the profession of law in India and direct them to refrain from having any illegal practice on the litigation side and in the field of commercial transactions in any manner whatsoever.

PLEADINGS

6. Averments in the petition are that the writ petitioner was an advocate enrolled with the Bar Council of Tamil Nadu. To practice law in India, a person has to be Indian citizen and should possess degree in law from a recognized University in India. Nationals of other countries could be admitted as advocates in India only if citizens of India are permitted to practice in such other countries. Foreign degree of law from a University outside India requires recognition by the Bar Council of India. The Indian advocates are not allowed to practice in U.K., U.S.A., Australia and other foreign nations except on fulfilling onerous restrictions like qualifying tests, experience, work permit. Foreign lawyers cannot be allowed to practice in India without reciprocity.

7. Under the Advocates Act (the Act), a foreigner is not entitled to practice in India in view of bar contained in Section

29. However, under the guise of LPOs (Legal Process Outsourcing), conducting seminars and arbitrations, foreign lawyers are visiting India on Visitor Visa and practicing illegally. They also violate tax and immigration laws. They have also opened their offices in India for practice in the fields of mergers, take-overs, acquisitions, amalgamations, etc. Disciplinary jurisdiction of the Bar Council extends only to advocates enrolled under the Act. In India, the legal profession is considered as a noble profession to serve the society and not treated as a business but the foreign law firms treat the profession as trade and business venture to earn money. Indian lawyers are prohibited from advertising, canvassing and solicit work but foreign law firms are advertising through websites and canvass and solicit work by assuring results. Many accountancy and management firms are also employing graduates and thus rendering legal services.

8. The stand of the Union of India initially was that if foreign law firms are not allowed to take part in negotiations, settling of documents and arbitrations in India, it will obstruct the aim of making India a hub of international arbitration. Many arbitrations with Indian Judges as arbitrators and Indian lawyers are held outside India where foreign and Indian law firms advise their clients. Barring the entry of foreign law firms for arbitrations in India will result in many arbitrations shifting to Singapore, Paris and London, contrary to the declared policy of the Government and against national interest. However, its final stand in affidavits dated 19th April, 2011 and 17th November, 2011 was different as recorded in Para 3 of the High Court Judgment as follows :

“3 . The first respondent Union of India filed four counter affidavits on 19.08.2010, 24.11.2010, 19.04.2011 and 17.11.2011. In one of the counter affidavits, it is stated that the Bar Council of India, which has been established under the Advocates Act, 1961, regulates the advocates who are on the “Rolls”, but law firms as such are not required to register themselves before any statutory authority, nor do they require any permission to engage in nonlitigation practice. Exploiting this loophole, many accountancy and management firms are employing law graduates who are rendering legal services, which is contrary to the provisions of the Advocates Act. It is stated that the Government of India along with the Bar Council of India is considering this issue and is trying to formulate a regulatory framework in this regard. The 1st respondent in his counter warns that if the foreign law firms are not allowed to take part in negotiations, settling up documents and arbitrations in India, it will have a counter productive effect on the aim of the government to make India a hub of International Arbitration. In this connection, it is stated that many arbitrations with Indian Judges and Lawyers as Arbitrators are held outside India, where both foreign and Indian Law Firms advise their clients. If foreign law firms are denied entry to deal with arbitrations in India, then India will lose many of the arbitrations to Singapore, Paris and London. It will be contrary to the declared policy of the government and against the national interest. In the counter affidavit filed on 19.04.2011, it is stated that a proposal to consider an amendment to Section 29 of the Advocates Act, 1961 permitting foreign law firms to practice law in India in non litigious matters on a reciprocity basis with foreign countries is under consultation with the Bar Council of India. Finally, in the counter filed on 17.11.2011, it is stated that the Government of India has decided to support the stand of the Bar Council of India that the provisions of the Advocates Act, 1961 would apply with equal force to both litigious and non-litigious practice of law, and it is only persons enrolled under Section 24 of the Act, who can practice before the Indian Courts.” (emphasis added)

9. In this Court, stand of the Union of India is that presently it is waiting for the Bar Council of India to frame rules on the subject. However, it can frame rules under Section 49A at any stage.

10. Stand of the Bar Council of India before the High Court is that even non litigious practice is included in the practice of law which can be done only by advocates enrolled under the Act. Reliance was placed on the judgment of the Bombay High Court in Lawyers Collective (supra). Further reference was made to Sections 24 and 29 of the Act. Section 47(2) read with Section 49(1)(e) provides for recognition of qualifications of foreigners being recognized for practice. It was submitted that practice of foreign lawyers in India should be subject to regulatory powers of the Bar Council.

11. Stand of the foreign law firms, inter alia, is that there is no bar to a company carrying on consultancy/support services in the field of protection and management of intellectual, business and industrial proprietary rights, carrying out market service and market research, publication of reports, journals etc. A person not appearing before Courts or Tribunals and not giving legal advice cannot be said to be practice of law. The ninth respondent stated that it was a part of group of companies and not a law firm and was duly registered under the Indian Companies Act, 1956. The tenth respondent, another foreign law firm, submitted that there is no violation of law in giving advice on foreign law. Even Indian lawyers are permitted to practice outside India and issue of reciprocity is a policy matter to be decided by the Government of India. It does not have a law office in India and does not give advice on Indian laws. In England, foreign lawyers are free to advice on their own system of law without nationality requirement or qualification of England. The eleventh respondent is an American law firm and submitted that it advises clients on international legal issues from different countries. Indian clients are given advice through Indian lawyers and law firms which are enrolled with the Bar Council. There is no discrimination in U.S. against Indian citizens practicing law. Indian lawyers travel to US on temporary basis for consultation on Indian law issues.

12. The Act and the Bar Council Rules govern practice of Indian law and not foreign law. Participation in seminars and conferences does not constitute practice in law. The fourteenth respondent denied the existence of its office in India and that it was practicing Indian law. It also took the same stand as Respondent No.11 that regulatory framework for advocates did not govern practice of foreign law. It denied that it is operating a Legal Process Outsourcing office (LPOs) in India. Its lawyers fly in and fly out of India on need basis to advice clients on international transactions. To the extent Indian law is involved, such matters are addressed by Indian lawyers. If the foreign law firms are prevented from advice on foreign law, the transaction cost of Indian clients for consultation on foreign law will increase. Other foreign law firms have also taken more or less similar stand. Fifteenth respondent stated that it is a Business Process Outsourcing (BPO) company providing wide range of customized and integrated services and functions. The sixteenth respondent also stated that it has no office in India and is only rendering services other than practice of Indian law. The eighteenth respondent stated that it does not have any office in India and does not practice law in India. It only advises on non Indian law. Respondent Nos.19, 26, 39 and 40 stated that they are limited law partnerships under Laws of England. They do not have any law office in India. Respondents Nos.20, 21, 24, 25, 27, 28, 30, 31, 32, 33, 34 and 38 also stated that they do not have any office in India and do not practice Indian law. Indian lawyers cannot advice on foreign laws and the requirement of Indian litigants in regard is met by foreign lawyers. Its lawyers fly in and fly out of India on need basis to advise the clients on international transactions. To the extent Indian law is involved such matters are addressed by Indian lawyers.

13. The respondent No.22 stated that it is an international law firm but does not have any office in India. It advises clients on laws other than Indian laws. Its India Practice Group advises clients on commercial matters involving an “Indian Element” relating to mergers, acquisitions, capital markets, projects, energy and infrastructure, etc. from an international legal perspective and it does not amount to practice in Indian law. Respondent No.23 stated that it is only advising on matters of English, European Union and Hong Kong laws. It has working relationships with leading law firms in major jurisdictions and instructs appropriate local law firms to provide local law advice. Respondent No.29 stated that it is a limited law partnership registered in England and Wales and does not have office in India. It does not represent parties in Indian courts nor advises on Indian law. Respondent No.35 stated that it does not maintain any office in India and its expertise in international law. 36th Respondent stated that it does not practice Indian law and has no office in India nor it operates any LPO. Its lawyers fly in and fly out on need basis to advise clients on international transactions or matters involving Australian laws or international Benches to which there is an Indian component. Working of Indian laws is entrusted to Indian lawyers. The 37th Respondent denied that it has any office in India or is running LPO in India. It only advises with respect to regulatory laws other than Indian law.

FINDINGS

14. The High Court upheld the plea of the foreign law firms to the effect that there was no bar to such firms taking part in negotiations, settling of documents and conducting arbitrations in India. There was no bar to carrying on consultancy/support services in the field of protection and management of intellectual, business and industrial proprietary rights, carrying out market survey and research, publication of reports, journals etc. without rendering any legal advice. This could not be treated as practice of law in India. Referring to Section 2(1)(f) of the Arbitration and Conciliation Act, 1996 (the Arbitration Act), it was observed that if in international commercial arbitration, India is chosen as the seat of arbitration, the foreign contracting party is bound to seek assistance from lawyers of their own country on the contract. There could be no prohibition for such foreign lawyers to advise their clients on the foreign law.

15. Judgment of the Bombay High Court in Lawyers Collective (supra) was distinguished on the ground that setting up of law offices for litigious and non litigious matters was different but if a foreign law firm without establishing any liaison office in India offers advice to their clients on foreign law, there was no legal bar to do so.

16. The Bombay High Court in its judgment observed:

“44. It appears that before approaching RBI, these foreign law firms had approached the Foreign Investment Promotion Board (FIPB for short) a High Powered body established under the New Industrial Policy seeking their approval in the matter. The FIPB had rejected the proposal submitted by the foreign law firms. Thereafter, these law firms sought approval from RBI and RBI granted the approval in spite of the rejection of FIPB. Though specific grievance to that effect is made in the petition, the RBI has chosen not to deal with those grievances in its affidavit in reply. Thus, in the present case, apparently, the stand taken by RBI & FIPB are mutually contradictory.

45. In any event, the fundamental question to be considered herein is, whether the foreign law firms namely respondent Nos. 12 to 14 by opening liaison offices in India could carry on the practise in non litigious matters without being enrolled as Advocates under the 1961 Act ?

46. Before dealing with the rival contentions on the above question, we may quote Sections 29, 30, 33 and 35 of the 1961 Act, which read thus:

29. Advocates to be the only recognised class of persons entitled to practice law. – Subject to the provisions of this Act and any rules made there under, there shall, as from the appointed day, be only one class of persons entitled to practise the profession of law, namely, advocates. (not brought into force so far)

30. Right of advocates to practise. -Subject to provisions of this Act, every advocate whose name is entered in the State roll shall be entitled as of right to practise throughout the territories to which this Act extends, 13 (i) in all Courts including the Supreme Court; (ii) before any tribunal or person legally authorized to take evidence; (iii) before any other authority or person before whom such advocate by or under any law for the time being in force entitled to practise.

33 . Advocates alone entitled to practise.

-Except as otherwise provided in this Act or in any other law for the time being in force, no person shall, on or after the appointed day, be entitled to practice in any Court or before any authority or person unless he is enrolled as an advocate under this Act.

35 . Punishment of advocates for misconduct – (1) Where on receipt of a complaint or otherwise a State Bar Council has reason to believe that any advocate on its roll has been guilty of professional or other misconduct, it shall refer the case for disposal to its disciplinary committee.

(1-A) The State Bar Council may, either of its own motion or on application made to it by any person interested, withdraw a proceeding pending before its disciplinary committee and direct the inquiry to be made by any other disciplinary committee of that State Bar Council.

(2) The disciplinary committee of a State Bar Council [***] shall fix a date for the hearing of the case and shall cause a notice thereof to be given to the advocate concerned and to the Advocate-General of the State.

(3) The disciplinary committee of a State Bar Council after giving the advocate concerned and the Advocate-General an opportunity of being heard, may make any of the following orders, namely:

(a) dismiss the complaint or, where the proceedings were initiated at the instance of the State Bar Council, direct that the proceedings be filed;

(b) reprimand the advocate;

(c) suspend the advocate from practice or such period as it may deem fit;

(d) remove the name of the advocate from the State roll of advocates.

(4) Where an advocate is suspended from practice under Clause (c) of Sub-section (3), he shall, during the period of suspension, be debarred from practising in any Court or before any authority or person in India.

(5) Where any notice is issued to the Advocate-General under Subsection (2), the Advocate-General may appear before the disciplinary committee of the State Bar Council either in person or through any advocate appearing on his behalf. Explanation-In this section, (Section 37 and Section 38), the expressions “Advocate- General” and “Advocate-General of the State” shall, in relation to the Union territory of Delhi, mean the Additional Solicitor General of India.

47 . The argument of the foreign law firms is that Section 29 of the 1961 Act is declaratory in nature and the said section merely specifies the persons who are entitled to practise the profession of law. According to the respondent Nos. 12 to 14, the expression ‘entitled to practise the profession of law’ in Section 29 of the 1961 Act does not specify the field in which the profession of law could be practised. It is Section 33 of the 1961 Act which provides that advocates alone are entitled to practise in any Court or before any authority or person.

Therefore, according to respondent Nos. 12 to 14 the 1961 Act applies to persons practising as advocates before any Court / authority and not to persons practising in non litigious matters. The question, therefore, to be considered is, whether the 1961 Act applies only to persons practising in litigious matters, that is, practising before Court and other authorities ?

48. In the statements of Objects & Reasons for enacting the 1961 Act, it is stated that the main object of the Act is to establish All India Bar Council and a common roll of advocates and Advocate on the common roll having a right to practise in any part of the country and in any Court, including the Supreme Court. Thus, from the Statement of Objects and Reasons, it is seen that the 1961 Act is intended to apply to (one) persons practising the profession of law in any part of the country and (two) persons practising the profession of law in any Court including the Supreme Court.

Thus, from the statement of objects and reasons it is evident that the 1961 Act is intended to apply not only to the persons practising before the Courts but it is also intended to apply to persons who are practising in non litigious matters outside the Court.

49. Apart from the above, Section 29 of the 1961 Act specifically provides is that from the appointed day, there shall be only one class of persons entitled to practice the profession of law, namely Advocates. It is apparent that prior to the 1961 Act there were different classes of persons entitled to practise the profession of law and from the appointed day all these class of persons practising the profession of law, would form one class, namely, advocates. Thus, Section 29 of the 1961 Act clearly provides that from the appointed day only advocates are entitled to practise the profession of law whether before any Court / authority or outside the Court by way of practise in non litigious matters.

50. Section 33 of the 1961 Act is a prohibitory section in the sense that it debars any person from appearing before any Court or authority unless he is enrolled as an advocate under the 1961 Act. The bar contained in Section 33 of the 1961 Act has nothing to do with the persons entitled to be enrolled as advocates under Section 29 of the 1961 Act. A person enrolled as an advocate under Section 29 of the 1961 Act, may or may not be desirous of appearing before the Courts. He may be interested in practising only in non litigious matters. Therefore, the bar under Section 33 from appearing in any Court (except when permitted by Court under Section 32 of the 1961 Act or any other Act) unless enrolled as an advocate does not bar a person from being enrolled as an advocate under Section 29 of the 1961 Act for practising the profession of law in non litigious matters. The Apex Court in the case of Ex-Capt. Harish Uppal (supra) has held that the right to practise is the genus of which the right to appear and conduct cases in the Court may be a specie. Therefore, the fact that Section 33 of the 1961 Act provides that advocates alone are entitled to practice before any Court / authority it cannot be inferred that the 1961 Act applies only to persons practising in litigious matters and would not apply to person practising in non litigious matters.

51. It was contended that the 1961 Act does not contain any penal provisions for breaches committed by a person practicing in nonlitigious matter and, therefore, the 1961 Act cannot apply to persons practising in nonlitigious matters. There is no merit in this contention, because, Section 35 of the 1961 Act provides punishment to an advocate who is found to be guilty of professional or other misconduct. The fact that Section 45 of the 1961 Act provides imprisonment for persons illegally practicing in Courts and before other authorities, it cannot be said that the 1961 Act does not contain provisions to deal with the persons found guilty of misconduct while practising in non litigious matters. Once it is held that the persons entitled to practice the profession of law under the 1961 Act covers the persons practising the profession of law in litigious matters as well as non-litigious matters, then, the penal provisions contained in Section 35 of the 1961 Act would apply not only to persons practising in litigious matter, but would also apply to persons practising the profession of law in non-litigious matters. The very object of the 1961 Act and the Rules framed by the Bar Council of India are to ensure that the persons practising the profession of law whether in litigious matters or in non litigious matters, maintain high standards in professional conduct and etiquette and, therefore, it cannot be said that the persons practising in non litigious matters are not governed by the 1961 Act.

52 . Strong reliance was placed by the counsel for the respondent No. 12 on the decision of the Apex Court in the case of O.N. Mohindroo (supra) in support of his contention that the 1961 Act applies only to persons practising the profession of law before Courts / Tribunals / other authorities. It is true that the Apex Court in the above case has held that the 1961 Act is enacted by the Parliament in exercise of its powers under entry 77 and 78 in List I of the Seventh Schedule to the Constitution.

However, the fact that entry 77 and 78 in List I refers to the persons practising before the Supreme Court and the High Courts, it cannot be said that the 1961 Act is restricted to the persons practising only before the Supreme Court and High Courts. Practising the profession of law involves a larger concept whereas, practising before the Courts is only a part of that concept. If the literal construction put forth by the respondents is accepted then, the Parliament under entry 77 & 78 in List I of the Seventh Schedule to make legislation only in respect of the advocates practicing before the Supreme Court / High Courts and the Parliament cannot legislate under that entry in respect of advocates practising before the District Courts/ Magistrate’s Courts / other Courts / Tribunals / authorities and consequently, the 1961 Act to the extent it applies to advocates practising in Courts other than the High Courts and Supreme Court would be ultra vires the Constitution. Such a narrow construction is unwarranted because, once the Parliament invokes its power to legislate on advocates practising the profession of law, then the entire field relating to advocates would be open to the Parliament to legislate and accordingly the 1961 Act has been enacted to cover the entire field. In any event, the question as to whether the persons practicing the profession of law exclusively in nonlitigious matters are covered under the 1961 Act, or not was not an issue directly or indirectly considered by the Apex Court in the case of O.N. Mohindroo (supra). Therefore, the decision of the Apex Court in the above case does not support the case of the contesting respondents.

…….. ……..

55. It was contended by the counsel for Union of India that if it is held that the 1961 Act applies to persons practising in non-litigious matters, then no bureaucrat would be able to draft or give any opinion in non-litigious matters without being enrolled as an advocate.

There is no merit in the above argument, because, there is a distinction between a bureaucrat drafting or giving opinion, during the course of his employment and a law firm or an advocate drafting or giving opinion to the clients on professional basis. Moreover, a bureaucrat drafting documents or giving opinion is answerable to his superiors, whereas, a law firm or an individual engaged in non litigious matters, that is, drafting documents / giving opinion or rendering any other legal assistance are answerable to none.

To avoid such anomaly, the 1961 Act has been enacted so as to cover all persons practising the profession of law be it in litigious matters or in non-litigious matters within the purview of the 1961 Act.

56. The argument that the 1961 Act and the Bar Councils constituted there under have limited role to play has been time and again negatived by the Apex Court. Recently, the Apex Court in the case of Bar Council of India v. Board of Management, Dayanand College of Law reported in MANU/SC/5219/2006 : (2007) 2 SCC 202 held thus:

It may not be correct to say that the Bar Council of India is totally unconcerned with the legal education, though primarily legal education may also be within the province of the universities. But, as the apex professional body, the Bar Council of India is concerned with the standards of the legal profession and the equipment of those who seek entry into that profession. The Bar Council of India is also thus concerned with the legal education in the country.

Therefore, instead of taking a pendantic view of the situation, the State Government and the recommending authority are expected to ensure that the requirement set down by the Bar Council of India is also complied with.

Thus, when efforts are being made to see that the legal profession stand tall in this fast changing world, it would be improper to hold that the 1961 Act and the Bar Council constituted there under have limited role to play in the field relating to practising the profession of law.

57. It is not in dispute that once a person is enrolled as an advocate, he is entitled to practise the profession of law in litigious matters as well as non-litigious matters. If the argument of the respondents that the 1961 Act is restricted to the persons practising the profession of law in litigious matters is accepted, then an advocate found guilty of misconduct in performing his duties while practising in non-litigious matters cannot be punished under the 1961 Act. Similarly, where an advocate who is debarred for professional misconduct can merrily carry on the practise in nonlitigious matters on the ground that the 1961 Act is not applicable to the persons practising the profession of law in non litigious matters. Such an argument which defeats the object of the 1961 Act cannot be accepted. 58. It may be noted that Rule 6(1) in Chapter III Part VI of the Bar Council of India Rules framed under Section 49(1) (ah) of the 1961 Act provides that an advocate whose name has been removed by an order of the Supreme Court or a High Court or the Bar Council as the case may be, shall not be entitled to practise the profession of law either before the Court and authorities mentioned under Section 30 of the 1961 Act, or in chambers, or otherwise. The above rule clearly shows that the chamber practise, namely, practise in non litigious matters is also within the purview of the 1961 Act.

59 . Counsel for the Union of India had argued that the Central Government is actively considering the issue relating to the foreign law firms practising the profession of law in India. Since the said issue is pending before the Central Government for more than 15 years, we direct the Central Government to take appropriate decision in the matter as expeditiously as possible. Till then, the 1961 Act as enacted would prevail, that is, the persons practising the profession of law whether in litigious matters or non litigious matters would be governed by the 1961 Act and the Bar Councils framed there under, apart from the powers of the Court to take appropriate action against advocates who are found guilty of professional misconduct.

60. For all the aforesaid reasons, we hold that in the facts of the present case, the RBI was not justified in granting permission to the foreign law firms to open liaison offices in India under Section 29 of the 1973 Act. We further hold that the expressions ‘ to practise the profession of law’ in Section 29 of the 1961 Act is wide enough to cover the persons practising in litigious matters as well as persons practising in non litigious matters and, therefore, to practise in non litigious matters in India, the respondent Nos. 12 to 14 were bound to follow the provisions contained in the 1961 Act. The petition is disposed of accordingly with no order as to costs.”

17. The Madras High Court agreed with the above view as follows :

“44. As noticed above, the facts of the case before the Bombay High Court were that the respondents which were foreign law firms practising the profession of law in US/UK sought permission to open their liaison office in India and render legal assistance to another person in all litigious and nonlitigious matters. The Bombay High Court, therefore, rightly held that establishing liaison office in India by the foreign law firm and rendering liaisoning activities in all forms cannot be permitted since such activities are opposed to the provisions of the Advocates Act and the Bar Council of India Rules. We do not differ from the view taken by the Bombay High Court on this aspect.”

18. The Madras High Court after above observation proceeded to consider the matter as follows:

“45 . However, the issue which falls for consideration before this Court is as to whether a foreign law firm, without establishing any liaison office in India visiting India for the purpose of offering legal advice to their clients in India on foreign law, is prohibited under the provisions of the Advocates Act. In other words, the question here is, whether a foreign lawyer visiting India for a temporary period to advise his client on foreign law can be barred under the provisions of the Advocates Act. This issue was neither raised nor answered by the Bombay High Court in the aforesaid judgment.”

19. It was held :

“51. We find force in the submission made by the learned counsel appearing for the foreign law firms that if foreign law firms are not allowed to take part in negotiations, for settling up documents and conduct arbitrations in India, it will have a counter productive effect on the aim of the Government to make India a hub of International Arbitration. According to the learned counsel, many arbitrations with Indian Judges and Lawyers as Arbitrators are held outside India, where both foreign and Indian law firms advise their clients. If foreign law firms are denied entry to deal with arbitrations in India, then India will lose many of the arbitrations to foreign countries. It will be contrary to the declared policy of the Government and against the national interest. Some of the companies have been carrying on consultancy/support services in the field of protection and management of intellectual, business and industrial proprietary rights, carrying out market surveys and market research and publication of reports, journals, etc. without rendering any legal service, including advice in the form of opinion, but they do not appear before any courts or tribunals anywhere in India. Such activities cannot at all be considered as practising law in India. It has not been controverted that in England, foreign lawyers are free to advice on their own system of law or on English Law or any other system of law without any nationality requirement or need to be qualified in England.

52. Before enacting the Arbitration and Conciliation Act, 1996 the Law Commission of India, several representative bodies of trade and industry and experts in the field of arbitration have proposed amendments to the Act to make it more responsive to contemporary requirements. It was also recognised that the economic reforms in India may not fully become effective if the law dealing with settlement of both domestic and international commercial disputes remains out of tune with such reforms. The United Nations Commission on International Trade Law (UNCITRAL) adopted in 1985 the Model Law on International Commercial Arbitration. The Arbitration and Conciliation Act is, therefore, consolidated and amended to the law relating to domestic and international commercial arbitration as well as for the enforcement of foreign arbitral award. The Act was enacted as a measure of fulfilling India’s obligations under the International Treaties and Conventions. On account of the growth in the international trade and commerce and also on account of long delays occurring in the disposal of suits and appeals in courts, there has been tremendous movement towards the resolution of disputes through alternative forum of arbitrators.

53. Section 2(1)(f) of the Act defines the term “International Commercial Arbitration” as under:-

(f) International Commercial Arbitration means an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is

(i) an individual who is a national of, or habitually resident in, any country other than India; or

(ii) a body corporate which is incorporated in any country other than India; or

(iii) a company or an association or a body of individuals whose central management and control is exercised in any country other than India; or

(iv) the Government of a foreign country.

54 . From the above definition, it is manifestly clear that any arbitration matter between the parties to the arbitration agreement shall be called an “international commercial arbitration” if the matter relates to the disputes, which may or may not be contractual, but where at least one of the parties habitually resides abroad whether a national of that country or not. The New York Convention will apply to an arbitration agreement if it has a foreign element or flavour involving international trade and commerce, even though such an agreement does not lead to a foreign award.

55 . International arbitration is growing big time in India and in almost all the countries across the globe. India is a signatory to the World Trade Agreement, which has opened up the gates for many international business establishments based in different parts of the world to come and set up their respective businesses in India.

56 . Large number of Indian Companies have been reaching out to foreign destinations by mergers, acquisition or direct investments. As per the data released by the Reserve Bank of India during 2009, the total out ward investment from India excluding that which was made by Banks, had increased 29.6% to U.S. Dollar 17.4 billion in 2007-08 and India is ranked third in global foreign direct investment. Overseas investments in joint ventures and wholly owned subsidiaries have been recognized as important avenues by Indian Entrepreneurs in terms of foreign exchange earning like dividend, loyalty, etc. India is the 7th largest, the second most populated country and the fourth largest economy in the world. Various economic reforms brought about have made India grow rapidly in the Asia-Pacific Region, and the Indian Private Sector has offered considerable scope for foreign direct investment, joint-venture and collaborations. Undoubtedly, these cross-border transactions and investments would give bigger opportunities for members of the legal fraternity, in order to better equip themselves to face the challenges. It is common knowledge that in the recent past, parties conducting International Commercial Arbitrations have chosen India as their destination. The arbitration law in India is modelled on the lines of the UNCITRAL Model Law of Arbitration and makes a few departures from the principles enshrined therein. The Arbitration and Conciliation Act 1996, provides for international commercial arbitration where at least one of the parties is not an Indian National or Body corporate incorporated in India or a foreign Government.

57. Institutional Arbitration has been defined to be an arbitration conducted by an arbitral institution in accordance with the rules of the institution. The Indian Council of Arbitration is one such body. It is reported that in several cases of International Commercial Arbitration, foreign contracting party prefers to arbitrate in India and several reasons have been stated to choose India as the seat of arbitration. Therefore, when there is liberalization of economic policies, throwing the doors open to foreign investments, it cannot be denied that disputes and differences are bound to arise in such International contracts. When one of the contracting party is a foreign entity and there is a binding arbitration agreement between the parties and India is chosen as the seat of arbitration, it is but natural that the foreign contracting party would seek the assistance of their own solicitors or lawyers to advice them on the impact of the laws of their country on the said contract, and they may accompany their clients to visit India for the purpose of the Arbitration. Therefore, if a party to an International Commercial Arbitration engages a foreign lawyer and if such lawyers come to India to advice their clients on the foreign law, we see there could be no prohibition for such foreign lawyers to advise their clients on foreign law in India in the course of a International Commercial transaction or an International Commercial Arbitration or matters akin thereto. Therefore, to advocate a proposition that foreign lawyers or foreign law firms cannot come into India to advice their clients on foreign law would be a far fetched and dangerous proposition and in our opinion, would be to take a step backward, when India is becoming a preferred seat for arbitration in International Commercial Arbitrations. It cannot be denied that we have a comprehensive and progressive legal frame work to support International Arbitration and the 1996 Act, provides for maximum judicial support of arbitration and minimal intervention. That apart, it is not in all cases, a foreign company conducting an International Commercial Arbitration in India would solicit the assistance of their foreign lawyers. The legal expertise available in India is of International standard and such foreign companies would not hesitate to avail the services of Indian lawyers.

Therefore, the need to make India as a preferred seat for International Commercial Arbitration would benefit the economy of the country.

58. The Supreme Court in a recent decision in Vodafone International Holdings B.V. vs. Union of India and another, SLP(C) No.26529 of 2010, dated 20.01.2012, observed that every strategic foreign direct investment coming to India, as an investment destination should be seen in a holistic manner. The Supreme Court observed that the question involved in the said case was of considerable public importance, especially on Foreign Direct Investment, which is indispensable for a growing economy like India. Therefore, we should not lose site of the fact that in the overall economic growth of the country, International Commercial Arbitration would play a vital part. The learned counsel appearing for the foreign law firms have taken a definite stand that the clients whom they represent do not have offices in India, they do not advise their foreign clients on matters concerning Indian Law, but they fly in and fly out of India, only to advise and hand-hold their clients on foreign laws. The foreign law firms, who are the private respondents in this writ petition, have accepted the legal position that the term “practice” would include both litigation as well as non-litigation work, which is better known as chamber practice. Therefore, rendering advice to a client would also be encompassed in the term “practice”.

59. As noticed above, Section 2(a) of the Advocates Act defines ‘Advocate’ to mean an advocate entered in any roll under the provisions of the Act. In terms of Section 17(1) of the Act, every State Bar Council shall prepare and maintain a roll of Advocates, in which shall be entered the names and addresses of

(a) all persons who were entered as an Advocate on the roll of any High Court under the Indian Bar Council Act, 1926, immediately before the appointed date and (b) all other persons admitted to be Advocates on the roll of the State Bar Council under the Act on or after the appointed date. In terms of Section 24(1) of the Act, subject to the provisions of the Act and the Rules made thereunder, a person shall be qualified to be admitted as an advocate on a state roll if he fulfils the conditions (a) a citizen of India, (b) has completed 21 years of age and (c) obtained a degree in Law. The proviso to Section 24(1)(a) states that subject to the other provisions of the Act, a National of any other country may be admitted as an Advocate on a State roll, if a citizen of India, duly qualified is permitted to practice law in that other country. In terms of Section 47(1) of the Act, where any country specified by the Central Government by notification prevents citizens of India practicing the profession of Law or subjects them to unfair discrimination in that country, no subject of any such country shall be entitled to practice the profession of Law in India. In terms of Sub-Section (2) of Section 47, subject to the provision of Sub-Section (1), the Bar Council of India may prescribe conditions, if any, subject to which foreign qualifications in law obtained by persons other than citizens of India shall be recognized for the purpose of admission as an Advocate under the Act. Thus, Section 47 deals with reciprocity. As per the statement of objects and reasons of the Advocates Act, it was a law enacted to provide one class of legal practitioners, specifying the academic and professional qualifications necessary for enrolling as a practitioner of Indian Law, and only Indian citizens with a Law Degree from a recognized Indian University could enrol as Advocates under the Act.

The exceptions are provided under the proviso to Section 24(1)(a), Section 24(1)(c)(iv) and Section 47(2). In the light of the scheme of the Act, if a lawyer from a foreign law firm visits India to advice his client on matters relating to the law which is applicable to their country, for which purpose he “flies in and flies out” of India, there could not be a bar for such services rendered by such foreign law firm/foreign lawyer.

60 . We are persuaded to observe so, since there may be several transactions in which an Indian company or a person of Indian origin may enter into transaction with a foreign company, and the laws applicable to such transaction are the laws of the said foreign country. There may be a necessity to seek legal advice on the manner in which the foreign law would be applied to the said transaction, for which purpose if a lawyer from a foreign law firm is permitted to fly into India and fly out advising their client on the foreign law, it cannot be stated to be prohibited. The corollary would be that such foreign law firm shall not be entitled to do any form of practice of Indian Law either directly or indirectly. The private respondents herein, namely the foreign law firms, have accepted that there is express prohibition for a foreign lawyer or a foreign law firm to practice Indian Law. It is pointed out that if an interpretation is given to prohibit practice of foreign law by a foreign law firms within India, it would result in a manifestly absurd situation wherein only Indian citizens with Indian Law degree who are enrolled as an advocate under the Advocates Act could practice foreign law, when the fact remains that foreign laws are not taught at graduate level in Indian Law schools, except Comparative Law Degree Courses at the Master’s level.

61 . As noticed above, the Government of India, in their counter affidavit dated 19.08.2010, have stated that the contention raised by the petitioner that foreign law firms should not be allowed to take part in negotiating settlements, settling up documents and arbitrations will be counter productive, as International Arbitration will be confined to a single country. It is further pointed out that many arbitrations are held outside India with Indian Judges and Lawyers as Arbitrators where both foreign and Indian Law firms advise their clients. It has been further stated if foreign law firms are denied permission to deal with arbitration in India, then we would lose many arbitrations to other countries and this is contrary to the declared policy of the Government and will be against the National interest, especially when the Government wants India to be a hub of International Arbitration

62 . At this juncture, it is necessary to note yet another submission made by the Government of India in their counter. It has been stated that law firms as such or not required to register themselves or require permission to engage in non-litigation practice and that Indian law firms elsewhere are operating in a free environment without any curbs or regulations. It is further submitted that the oversight of the Bar Council on non-litigation activities of such law firms was virtually nil till now, and exploiting this loop hole, many accountancy and management firms are employing law graduates, who are rendering legal services, which is contrary to the Advocates Act. Therefore, the concern of the Government of India as expressed in the counter affidavit requires to be addressed by the Bar Council of India. Further, it is seen that the Government in consultation with the Bar Council of India proposes to commission a study as to the nature of activities of LPOs, and an appropriate decision would be taken in consultation with the Bar Council of India.”

RIVAL CONTENTIONS

20. Shri C.U. Singh, learned senior counsel for the Bar Council of India submitted that Advocates enrolled with the Bar Council of India are the only recognized class of persons entitled to practice law in India. Unless any other law so permits, no person can practice before any ‘Court, authority or person’ other than an Advocate enrolled under the Act. In particular cases, the ‘Court, authority or person’ may permit a person other than an advocate enrolled under the Act to appear before him. It was submitted that the expression “practice profession of law” covered not only appearance before the Court but also opinion work which is also known as chamber practice. The Ethics prescribed by the Bar Council of India covered not only conduct in appearing before Court or authority but also in dealing with the clients including giving legal opinion, drafting or participation in law conference. If a person practices before any ‘Court, authority or person’ illegally, is liable to punishment for imprisonment which may extend to six months. Thus, the view taken by the Madras High Court that visit by a foreign lawyer on fly in and fly out basis to give advice on foreign law or to conduct arbitration in international commercial arbitrations was erroneous. Reference has also been made to definition of the term ‘advocate’ under Section 2(a) of the Act. Section 6 lays down functions of the Bar Council including admission of persons as advocates, safeguarding rights, privileges and interests of advocates. Section 17 lays down that every State Bar Council shall prepare a roll of advocates and no person can be enrolled in more than one State Bar Council. Section 24 lays down qualifications for admission on the roll of a State Bar council. The qualifications include the citizenship of India, unless a person is national of a country where citizens of India are permitted to practice. One is required to have the prescribed qualification from India or out of India if such degree is recognized by the Bar Council of India, being a Barrister called to the Bar before 31st December, 1976, passing of articled clerks examination or any other examination specified by the Bombay or Calcutta High Court or obtaining foreign qualification recognized by the Bar Council of India are also the prescribed qualifications. It was submitted that even in other jurisdictions, persons other than those enrolled with the concerned Bar Council are not allowed to practice. Even short term running of legal service is subject to regulatory regime.

21. Learned counsel for the foreign law firms S/Shri Arvind Datar, Sajjan Poovayya, Dushyant Dave, learned senior counsel and Mr. Nakul Dewan, learned counsel supported the direction of the Madras High Court permitting foreign lawyers to render legal services on fly in and fly out basis and also with reference to international commercial arbitrations. It was submitted that Bar Council could come into picture only in respect of advocates enrolled with it. It is only with reference to appearance before the Courts or other authorities or persons that the regulatory regime of the Bar Council may apply but with regard to non litigation/advisory work even those not enrolled as advocates under the Advocates Act are not debarred. It was also submitted by Shri Dewan that Advocates Act applies only to individuals and not to law firms. Provision for reciprocity applies only for enrolment under the Advocates Act and not for casual legal services on fly in and fly out basis or in connection with international commercial arbitration. Foreign lawyers are regulated by the disciplinary regime applicable to them and only their Bar Councils could take action with regard to their working in India also. Practice of law in India did not cover advising on foreign law. Thus, if by a pre-determined invitation, a foreign lawyer visited India to advise on a foreign law, there is no bar against doing so.

22. Certain decisions have been cited at the Bar to which reference may be made. In Roel versus New York County Lawyers Association3, the Court of Appeals of the State of New York dealt with a case where a Mexican citizen and lawyer, who was not a citizen of the United States nor a member of the New York Bar, maintained his office in New York and advised members of the public on Mexican law. He did not give any advice as to New York law. The majority held that this was not permissible. It was observed:

“To allow a Mexican lawyer to arrange the institution of divorce proceedings for a New York resident in a Mexican court, without allowing him to tell the client that the divorce might be invalid (Querze v. Querze, 290 N.Y.

13) or that it might adversely affect estate or other property rights or status in this State (Matter of Rathscheck, 300 N.Y. 346), is to give utterly inadequate protection to him (See 70 Harv.L.Rev. 1112-1113). Nor are we in anywise persuaded by the argument in the brief of the Association of the Bar that there is any difference between the right of a Mexican lawyer to act and advise the public in divorce matters and the right (3 N.Y.2d 232) of foreign lawyers generally to act an advise with respect to foreign law. … …

The complex problem posed by the activities of foreign attorneys here is a long-standing one. It may well be that foreign attorneys should be licensed to deal with clients in matters exclusively concerning foreign law, but that is solely within the province of the Legislature. Our courts are given much control over the lawyers admitted to the Bar of our State; we have no control, however, over those professing to be foreign law experts.

We see no substance in appellant’s claim that section 270 of the Penal Law when applied to him deprives him of liberty and property without due process of law, in that the statute as so construed is unreasonable and serves no public purpose.”

3 3 N.Y.2d 224 (1957)

23. The minority view, on the other hand, held that:

“In this century when the United States has become the creditor nation of the world and when the ramifications of our industrial, commercial, financial and recreational lives extend to every corner of the global, it is especially improbable that the Legislature intended to preclude the giving of legal advice in this State to our citizens concerning these far-flung enterprises by trained lawyers from abroad who are equipped to give accurate information and opinions regarding them. The customary residential requirements for admission to the Bar would in themselves often preclude their becoming admitted to our Bar. … …

The omission of the Legislature to enact statutes licensing or regulating the conduct of foreign lawyers in practicing purely foreign law in this State, does not indicate that such conduct is prohibited by sections 270 and 271 of the Penal Law, but merely that the Legislature has not seen fit to subject them to regulation. Whatever the merits of such proposed legislation, it is not for us to enact it. If foreign lawyers came under section 270 and 271 of the Penal Law, it would stifle their activities to the detriment of the large and increasing number of our nationals who engage in transactions in foreign countries, inasmuch as it would be impossible for most of them to be admitted to practice in this State.”

24. In Appell versus Reiner4, the Supreme Court of New Jersey dealt with a case of New York lawyer, who was not admitted to the New Jersey Bar, giving legal services to New Jersey residents in a matter involving the extension of credit and the compromise of claims held by New York and New Jersey creditors. The Chancery Division held that the New York lawyer could not advice in respect of New Jersey creditors. The Supreme Court of New Jersey held:- “The Chancery Division correctly delineated the generally controlling principle that legal services to be furnished to New Jersey residents relating to New Jersey matters may be furnished only by New Jersey counsel. We nevertheless recognize that there are unusual situations in which a strict adherence to such a thesis is not in the public interest. In this connection recognition must be given to the numerous multi-state transactions arising in modern times. This is particularly true of our State, situated as it is in the midst of the financial and manufacturing center of the nation. An inflexible observance of the generally controlling doctrine may well occasion a result detrimental to the public interest, and it follows that there may be instances justifying such exceptional treatment warranting the ignoring of state lines. This is such a situation. Under the peculiar facts here present, having in mind the nature of the services to be rendered, the inseparability of the New York and New Jersey transactions, and the substantial nature of the New York claim, we conclude that plaintiff’s agreement to furnish services in New Jersey was not illegal and contrary to public policy.

It must be remembered that we are not here concerned with any participated by plaintiff in a court proceeding. What is involved is the rendering of advice and assistance in obtaining extensions of credit and compromises of indebtedness. … …”

25. Again, there was a dissenting view as follows:

“… …Regulation of the interests of the public and the bar requires a rule of general application. In cases such as we have here, the only fair and workable rule is one which recognizes that the client’s matter is primarily a New Jersey one and calls for the engagement of a member of our bar for the legal services to be rendered here. And, in that connection, in the interest of interstate amity, if an out-ofstate attorney renders legal services in New Jersey which are a minor or incidental part of a total problem which has its principal and primary aspects in his state, he should be allowed to recover in our courts for the work done in this jurisdiction.”

26. Mr. Poovayya referred to Rules of the Indian Council of Arbitration which could apply only if there was an agreement between the parties that the arbitration was to be in accordance with the Rules of the Indian Council of Arbitration. Rule 45 laid down that parties have no right to be represented by lawyers unless the arbitral tribunal considers it necessary and allows.

27. Referring to the Arbitration Act, it was submitted that international commercial arbitration is defined under Section 2(f) which covers arbitration relating to disputes where one of the parties is a national or habitual resident of a country other than India or a body corporate incorporated outside India or an association of body of individuals whose management and control is exercised in a country other than India or a Government of a foreign country. In such cases, parties may agree to have an arbitrator of any nationality, to any language to be used in arbitration proceedings, to any place of arbitration. Section 28(b) permits Arbitral Tribunal to decide disputes in accordance with rules of law applicable to the substance of the dispute as agreed by the parties.

The arbitrator has to give equal opportunity to the parties to present their case (Section 18). Parties can agree on the procedure to be followed (Section 19). Section 34(2)(a)(iii) provides that an award may be set aside, inter-alia, on the ground that the party was unable to present its case in the arbitration proceedings. Procedure for presenting case of a party before the arbitrator may be governed by agreement or by the procedural rules.

28. Shri Dushyant Dave referred to rules of certain Arbitration Institutions to the effect that the parties are free to be represented by an outside lawyer. It was submitted that by way of Convention in international commercial arbitrations, there cannot be any compulsion to engage only a local lawyer. Section 48(1)(b) of the Arbitration Act provides that enforcement of a foreign award can be refused if the parties were unable to present their case. The New York Convention Awards are governed by the First Schedule to the Act. Article-II provides for recognition of an arbitration agreement between the parties. Article-V(1)(b) provides that if the party against whom the award is invoked was not given proper notice or could not present his case, the award cannot be enforced. Section 53 of the Arbitration Act refers to Geneva Convention Awards which is regulated by the Second Schedule to the Act containing similar provisions.

29. Mr. Dave submitted that the Special Leave Petition arising out of the Delhi High Court order is on the question whether London Court of International Arbitration could use the expression “COURT” had become infructuous as the respondent had closed its working in India. He, however, referred the following:

I) Handbook of ICC Arbitration – Commentary, Precedents, Materials – Second Edition (Michael W. Buhler and Thomas H. Webster)

Article 21(4): “The parties may appear in person or through duly authorized representatives. In addition, they may be assisted by advisers.”

The authors’ comment is as follows:

“In an ICC arbitration, parties have the right to be represented by the persons of their choice. A distinction should however be made between “authorized representatives” and “advisors”. Usually, the parties have attorneys represent them in the arbitration. Thus, an attorney may have both capacities, but this may not always be the case. As an adviser, he or she would not need a power of attorney. On the other hand, as a representative of a party, he or she might need a power of attorney. In arbitration. The major centres of arbitration do not appear to have restrictions on the right of lawyers from other countries to argue cases in those countries, with the possible exception of California.”

The footnote 31 is as follows:

“See Birbower, Montabano, Condon & Frank, P.C. v. The Superior Court of Santa Clara, 949 P.2d 1 (Cal. 1998); see also Holtzmann and Donovan,

“United States Country Report” in ICCA Handbook, Supp. 28 (Paulsson edn, 1999). The California Rules of Court were modified in 2004 in order to permit any US qualified lawyer to represent a party in an arbitration (r.966). However, it remains unclear whether lawyers admitted to foreign bars can represent parties in national or international arbitration.”

II) Arbitration of Commercial Disputes – International and English Law and Practice (Andrew Tweeddale and Keren Tweeddale). Representation of the parties

10.15. The right to legal representation at trial has existed both in the common law and in international treaties for centuries5. However, the right to legal representation is not absolute. The parties may agree to dispense with legal representation6. Furthermore, some rules of arbitration prohibit the use of legal representation7. In international commercial arbitrations it is generally accepted that the parties may choose their own advocate without necessarily choosing one qualified at the seat of the arbitration8. However, in a few recent cases that principle has been challenged9.”

III) Redfern and Hunter on International Arbitration

“In general, the parties may also be represented by engineers, or commercial men, for the purpose of putting forward the oral submissions, and even for the examination of witnesses. It is not uncommon, where a case involves technical issues, for an engineer or other professional man to be part of the team of advocates representing a party at a hearing, although it is more usual for such technical experts to be called as witnesses

in order that their opinions and submissions may be tested by cross-examination. However, it may sometimes be convenient and save time if technical experts address the arbitral tribunal directly as party representatives10. The Supreme Court of California held in 1998 that representing a party in an arbitration without its seat in California was ‘engaging in the practice of law’ in that state. It followed that a New York lawyer, not a member of the Californian Bar, was not qualified to represent his client in a Californian arbitration; and was thus unable to recover his fee when he sued for it11. Fortunately the court stated that the rule did not apply in international arbitration. IN England there is not, and never has been, any danger of a similar situation arising12. A party to an arbitration may, in theory, be represented by his plumber, his dentist, or anyone else of his choosing, although the choice usually falls on a lawyer or specialist claims consultant in the relevant industry13.”

IV) LONDON COURT OF INTERNATIONAL ARBITRATION (LCIA) RULES (2014)

Article 18 – Legal Representatives

“18.1Any party may be represented in the arbitration by one or more authorized legal representatives appearing by name before the Arbitral Tribunal.

18.2 Until the Arbitral Tribunal’s formation, the Registrar may request from any party: (i) written proof of the authority granted by that party to any legal representative designated in its Request or Response; and (ii) written confirmation of the names and addresses of all such party’s legal representatives in the arbitration. After its formation, at any time, the arbitral Tribunal may order any party to provide similar proof or confirmation in any form considers appropriate.”

4 43 N.J. 313 (1964); 204 A.2d 146

5 See, for example, art 42 of the Statute of the International Court of Justice which states: ‘1. The parties shall be represented by agents. 2. They may have the assistance of counsel or advocates before the Court. 3. The agents, counsel, and advocates of parties before the Court shall enjoy the privileges and immunities necessary to the independent exercise of their duties.’ See also art 37 of the Hague Convention 1899 which states: ‘The parties have the right to appoint delegates or special agents to attend the Tribunal, for the purpose of serving as intermediaries between them and the Tribunal. They are further authorized to retain, for the defense of their rights and interests before the Tribunal, counsel or advocates appointed by them for this purpose.’

6 Henry Bath & Son Ltd. v. Birgby Products [1962] Lloyd’s Rep 389; and see also the English Arbitration Act 1996, s 36.

7 The arbitration rules of the Australian Football league, for example, limit legal representation.

8 See, for example, In the matter of an Arbitration between Lawler, Matusky and Skelly, Engineers and the Attorney General of Barbados (No.320 of 1981) 22 August 1983 where the High Court of Barbados held that there was a ‘common law right of everyone who is sui juris to appoint an agent for any purpose’. The court held that this included the right to appoint a representative to appear as advocate on a party’s behalf in a commercial arbitration.

9 In the matter of an Arbitration between Builders Federal (Hong Kong) Ltd. and Joseph Gartner & Co., and Turner (East Asia) Pte Ltd (No. 90 of 1987) (1988) 2 MLJ 280 the Malaysian Judicial Commissioner Chan Sek Keong ruled that the respondents, who were a foreign company, could not select a counsel from their own country because Singapore’s Legal Profession Act operated as a bar to foreign lawyers from representing their clients in international arbitrations in Singapore.

However, in June 2004 Singapore finally amended its Legal Profession Act to eliminate this restriction on representation by foreign lawyers in arbitrations in Singapore. See also Birbrower, Montabano, Condon & Frank v. SuperiorCourtofSanta ClaraCounty, 1998 Cal LEXIS 2, 1998 WL 1346 (Cal1/5/98) where the court held that a New York lawyer representing a client in a Californian arbitration was not qualified to act for his client because he was not called to the Californian bar and therefore not entitled to recover his fees. The court, however, stated that this principle would not apply to an international commercial arbitration.

10 Both the UNCITRAL RULES (Art4) and the LCIA Rules (Art18) make it clear that parties are entitled to be represented by non-lawyers.

11 Birbrower, Montabane, Condon Frank v. The SuperiorCourtofSanta ClaraCounty, 1998 Cal Lexis2; 1998 WL 1346 (Cal1/5/98)

12 i.e. that only a member of the local bar should be entitled to represent a party in a judicial or quasi-judicial proceeding.

13 English Arbitration Act, 1996, s 36. This reaffirms the previous common law position.

V) CHINA INTERNATIONAL ECONOMIC AND TRADE ARBITRATION COMMISSIN (CIETAC) ARBITRATION RULES.

Article 22 – Representation

“A party may be represented by its authorized Chinese and/or foreign representative(s) in handling matters relating to the arbitration. In such a case, a Power of Attorney shall be forwarded to the Arbitration Court by the party or its authorized representative(s).”

VI) ARBITRATION RULES, MEDIATION RULES OF INTERNATIONAL CHAMBER OF COMMERCE.

ARTICLE 26 – Hearings

“4. The parties may appear in person or through duly authorized representatives. In addition, they may be assisted by advisers.”

VII) COMMERCIAL ARBITRATION RULES AND MEDIATION PROCEDURES OF AMERICAN ARBITRATION ASSOCIATION

R-26. Representation

“Any party may participate without representation (pro se), or by counsel or any other representative of the party’s choosing, unless such choice is prohibited by applicable law. A party intending to be so represented shall notify the other party and the AAA of the name, telephone number and address, and email address if available, of the representative at least seven calendar days prior to the date set for the hearing at which that person is first to appear. When such a representative initiates an arbitration or responds for a party, notice is deemed to have been given.”

VIII)ARBITRATION RULES OF THE SINGAPORE INTERNATIONAL ARBITRATION CENTRE (SIAC)

Party Representatives

“23.1Any party may be represented by legal practitioners or any other authorized representatives. The Registrar and/or the Tribunal may require proof of authority of any party representatives.

23.2 After the constitution of the Tribunal, any change or addition by a party to its representatives shall be promptly communicated in writing to the parties, the Tribunal and the Registrar.”

IX) RULES OF INTERNATIONAL COMMERCIAL ARBITRATION BY INDIAN COUNCIL OF ARBITRATION

20. Party Representation and assistance

“At the hearing, a party shall be entitled to appear through Attorney, Advocate or a duly authorized Advisor or Representative or in person, subject to such proof of authority to the satisfaction of the Registrar or the Tribunal.”

30. Shri C.U. Singh, learned senior counsel, by way of rejoinder, opposed the submissions of learned counsel appearing for the foreign law firms. He submitted that the stand of the Central Government finally was to support the stand of the Bar Council of India. The argument that participation of foreign lawyers will be in the interest of the country was raised by the foreign law firms only as shown from para 51 of the Madras High Court judgment. He submitted that the arbitrator was also an ‘authority’ before whom only advocates enrolled in India alone could appear. The arbitrator could record evidence and summon witnesses through Court(Section 27). Rules of Arbitration Institutions have to be in conformity with the law of the land. He also submitted that the rules framed by the Bar Council of India under Section 49 define the practice of law so as to cover even giving of opinion.

31. Shri Singh further pointed out that Ethics for the profession as applicable in India are different from the Ethics applicable in other countries. In this regard, it was submitted that Rule 36 in Part VI, Chapter II of the BCI Rules prohibits direct or indirect advertising by advocates, or solicitation by any means whatsoever. Rule 18 bars an advocate from fomenting litigation. In Bar Council of Maharashtra versus M.V. Dabholkar (1976) 2 SCC 291, this Court held that advertising was a serious professional misconduct for an advocate. As against this, in USA Rule 7.3 of the American Bar Association Rules bars only in-person or live telephonic solicitation of clients, but expressly permits lawyer-to-lawyer solicitation, as well as client solicitation by written, recorded or electronic communication, unless the target of solicitation has made known to the lawyer his desire not to be solicited, or the solicitation involved coercion, duress or harassment. The US Supreme Court, inter alia, in Zauderer versus Office of Disciplinary Counsel 471 US 626 (1985) and in Shapero versus Kentucky Bar Association 486 US 466 struck down disciplinary actions against lawyers for soliciting clients through print advertisements or hoardings. In UK, Solicitors Regulation Authority(SRA) is a regulatory body established under the Legal Services Act, 2007. Chapter 8 of the SRA Handbook permits publicity of the law firm but prohibits solicitations.

32. In India, with regard to Contingency fees, Rule 20 in Part VI, Chapter II of the BCI Rules bars an advocate from stipulating a fee contingent on the results of the litigation or from agreeing to share the proceeds thereof. Rule 21 prohibits practices akin to champerty or maintenance, and prohibits an advocate from buying or trafficking in or stipulating or agreeing to receive any share or interest in an actionable claim. In USA Rule 1.5 (c) of the ABA Rules permits lawyers to charge contingency fees, except in certain specified cases like criminal defence, etc. Fee-splitting arrangements between lawyers from different firms are also permitted with some restrictions. In U.K., Section 58 of the Courts and Legal Services Act, 1990 permits “conditional fee agreements” except in criminal proceedings and family law matters and Section 58AA permits “damages-based fee agreements”, all of which entitle legal practitioners to a share of the “winnings”.

33. In India, there are no rules framed by the Bar Council on the subject ‘sale of law practice’. In U.S.A., Rule 1.17 permits law firms or lawyers having private practice to sell their practice including the goodwill. In U.K., SRA Guidelines permit sale of practice as a going concern or acquisition of a practice which is closing down.

34. In India, senior advocates are barred from interacting directly with clients, and are not permitted to draft pleadings or affidavits, correspond on behalf of clients, or to appear in court unassisted by an advocate (Part VI, Chapter I of the Bar Council of India Rules). In U.S.A., no such distinction or designations are made. In U.K., there appear to be no restrictions on Queen’s Counsel (QCs) similar to the ones imposed by the Bar Council in India. QCs are permitted to join law firms as partners.

35. In India, funding of litigation by advocates is not explicitly prohibited, but a conjoint reading of Rule 18 (fomenting litigation), Rule 20 (contingency fees), Rule 21 (share or interest in an actionable claim) and Rule 22 (participating in bids in execution, etc.) would strongly suggest that advocates in India cannot fund litigation on behalf of their clients. There appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation. In U.S.A., lawyers are permitted to fund the entire litigation and take their fee as a percentage of the proceeds if they win the case. Third Party Litigation Funding/Legal Financing agreements are not prohibited. In U.K., Section 58B of the Courts and Legal Services Act, 1990 permits litigation funding agreements between legal service providers and litigants or clients, and also permits third party Litigation Funding or Legal Financing agreements, whereby the third party can get a share of the damages or “winnings”.

36. In India, partnerships with non-lawyers for conducting legal practice is not permitted. In U.K., Section 66 of the Courts and Legal Services Act, 1990 expressly permits solicitors and barristers to enter into partnerships with non-solicitors and non-barristers.

CONSIDERATION OF THE ISSUES

37. We have considered the rival submissions. Questions for consideration mainly arise out of directions in para 63 of the Madras High Court judgment which have already been quoted in the beginning of this judgment. viz. :

(i) Whether the expression ‘practise the profession of law’ includes only litigation practice or non-litigation practice also;

(ii) Whether such practice by foreign law firms or foreign lawyers is permissible without fulfilling the requirements of Advocates Act and the Bar Council of India Rules;

(iii) If not, whether there is a bar for the said law firms or lawyers to visit India on ‘fly in and fly out’ basis for giving legal advice regarding foreign law on diverse international legal issues;

(iv) Whether there is no bar to foreign law firms and lawyers from conducting arbitration proceedings and disputes arising out of contracts relating to international commercial arbitration;

(v) Whether BPO companies providing integrated services are not covered by the Advocates Act or the Bar Council of India rules.

RE : (i)

38. In Pravin C. Shah versus K.A. Mohd. Ali 17 (2001) 8 SCC 650 , it was observed that right to practice is genus of which right to appear and conduct cases is specie. It was observed:

“………The right of the advocate to practise envelopes a lot of acts to be performed by him in discharge of his professional duties. Apart form appearing in the courts he can be consulted by his clients, he can give his legal opinion whenever sought for, he can draft instruments, pleadings, affidavits or any other documents, he can participate in any conference involving legal discussions etc. ……”

In Ex. Capt. Harish Uppal versus Union of India 18 (2003) 2 SCC 45, same view was reiterated.

39. Ethics of the legal profession apply not only when an advocate appears before the Court. The same also apply to regulate practice outside the Court. Adhering to such Ethics is integral to the administration of justice. The professional standards laid down from time to time are required to be followed. Thus, we uphold the view that practice of law includes litigation as well as non litigation.

RE : (ii)

40. We have already held that practicing of law includes not only appearance in courts but also giving of opinion, drafting of instruments, participation in conferences involving legal discussion. These are parts of non-litigation practice which is part of practice of law. Scheme in Chapter-IV of the Advocates Act makes it clear that advocates enrolled with the Bar Council alone are entitled to practice law, except as otherwise provided in any other law. All others can appear only with the permission of the court, authority or person before whom the proceedings are pending. Regulatory mechanism for conduct of advocates applies to non-litigation work also. The prohibition applicable to any person in India, other than advocate enrolled under the Advocates Act, certainly applies to any foreigner also.

RE : (iii)

41. Visit of any foreign lawyer on fly in and fly out basis may amount to practice of law if it is on regular basis. A casual visit for giving advice may not be covered by the expression ‘practice’. Whether a particular visit is casual or frequent so as to amount to practice is a question of fact to be determined from situation to situation. Bar Council of India or Union of India are at liberty to make appropriate rules in this regard. We may, however, make it clear that the contention that the Advocates Act applies only if a person is practicing Indian law cannot be accepted. Conversely, plea that a foreign lawyer is entitled to practice foreign law in India without subjecting himself to the regulatory mechanism of the Bar Council of India Rules can also be not accepted. We do not find any merit in the contention that the Advocates Act does not deal with companies or firms and only individuals. If prohibition applies to an individual, it equally applies to group of individuals or juridical persons.

RE: (iv)

42. It is not possible to hold that there is absolutely no bar to a foreign lawyer for conducting arbitrations in India. If the matter is governed by particular rules of an institution or if the matter otherwise falls under Section 32 or 33, there is no bar to conduct such proceedings in prescribed manner. If the matter is governed by an international commercial arbitration agreement, conduct of proceedings may fall under Section 32 or 33 read with the provisions of the Arbitration Act. Even in such cases, Code of Conduct, if any, applicable to the legal profession in India has to be followed. It is for the Bar Council of India or Central Government to make a specific provision in this regard, if considered appropriate.

RE: (v)

43. The BPO companies providing range of customized and integrated services and functions to its customers may not violate the provisions of the Advocates Act, only if the activities in pith and substance do not amount to practice of law. The manner in which they are styled may not be conclusive. As already explained, if their services do not directly or indirectly amount to practice of law, the Advocates Act may not apply. This is a matter which may have to be dealt with on case to case basis having regard to a fact situation.

44. In view of above, we uphold the view of the Bombay High Court and Madras High Court in para 63 (i) of the judgment to the effect that foreign law firms/companies or foreign lawyers cannot practice profession of law in India either in the litigation or in nonlitigation side. We, however, modify the direction of the Madras High Court in Para 63(ii) that there was no bar for the foreign law firms or foreign lawyers to visit India for a temporary period on a “fly in and fly out” basis for the purpose of giving legal advice to their clients in India regarding foreign law or their own system of law and on diverse international legal issues. We hold that the expression “fly in and fly out” will only cover a casual visit not amounting to “practice”. In case of a dispute whether a foreign lawyer was limiting himself to “fly in and fly out” on casual basis for the purpose of giving legal advice to their clients in India regarding foreign law or their own system of law and on diverse international legal issues or whether in substance he was doing practice which is prohibited can be determined by the Bar Council of India. However, the Bar Council of India or Union of India will be at liberty to make appropriate Rules in this regard including extending Code of Ethics being applicable even to such cases.

45. We also modify the direction in Para 63 (iii) that foreign lawyers cannot be debarred from coming to India to conduct arbitration proceedings in respect of disputes arising out of a contract relating to international commercial arbitration. We hold that there is no absolute right of the foreign lawyer to conduct arbitration proceedings in respect of disputes arising out of a contract relating to international commercial arbitration. If the Rules of Institutional Arbitration apply or the matter is covered by the provisions of the Arbitration Act, foreign lawyers may not be debarred from conducting arbitration proceedings arising out of international commercial arbitration in view of Sections 32 and 33 of the Advocates Act. However, they will be governed by code of conduct applicable to the legal profession in India. Bar Council of India or the Union of India are at liberty to frame rules in this regard. 46. We also modify the direction of the Madras High Court in Para 63(iv) that the B.P.O. Companies providing wide range of customized and integrated services and functions to its customers like word processing, secretarial support, transcription services, proof reading services, travel desk support services, etc. do not come within the purview of the Advocates Act, 1961 or the Bar Council of India Rules. We hold that mere label of such services cannot be treated as conclusive. If in pith and substance the services amount to practice of law, the provisions of the Advocates Act will apply and foreign law firms or foreign lawyers will not be allowed to do so. The Civil Appeals are disposed of accordingly. .….………………………………..J. [ADARSH KUMAR GOEL] .….………………………………..J. [UDAY UMESH LALIT] NEW DELHI; MARCH 13, 2018.

Bombay High Court Criticizes Advocates For Unethical Conduct

MASTI

In the latest judgement of the Bombay High Court dated 5th March 2018 in Anand Agarwal vs. Vilas Chandrakant Gaokar, strictures have been passed against advocates for indulging in unethical practices.

The judgement of the Bombay High Court has been passed by S. J. KATHAWALLA, J.

It has been observed in the judgement by the Bombay High Court that certain Advocates have forgotten the code of eithcs that enjoins upon all Advocates, that they are Officers of the Court first and Advocates of their clients only thereafter.

The Court has expressed anguish that such Advocates facilitate the unethical misadventures of their clients, often encouraging their clients’ dishonest practices, causing grave stress to the Judiciary, and unfortunately bringing the entire judicial system to disrepute.

The judgement noted that it has become a vicious and despicable cycle wherein dishonest litigants with mala- fide intentions seek out unethical Advocates, who for hefty fee and the lure of attracting similar new and unscrupulous clients, conveniently choose to disregard and/or forget all ethics and the code of conduct enjoined upon this august profession.

The judgement of the Bombay High Court records that it is with a heavy heart that Courts at times note that clients have no hesitation in replacing good and honest Advocates, with unscrupulous ones, who go to any dishonest lengths, merely to secure favourable orders for their clients

Text of judgement of Bombay High Court in Anand Agarwal vs. Vilas Chandrakant Gaokar

IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
IN ITS COMMERCIAL DIVISION
NOTICE OF MOTION (L) NO. 706 OF 2017
IN
COMMERCIAL SUIT NO. 614 OF 2017

Vilas Chandrakant Gaokar )
6 Sence, Gokhale Road, Prabhadevi, Mumbai – 25. )… Applicant
IN THE MATTER BETWEEN :
1. Mr. Anand Agarwal )
2. Mrs. Pramila Anand Agarwal )
Both adults of Mumbai, Indian inhabitants, )
residing at 17/A, Dr. Bhagwanlal Inderjit Road, )
6th Floor, Sea Crest Building, )
Mumbai – 400 006 )… Plaintiffs
Versus
1. Vilas Chandrakant Gaokar, )
Adult of Mumbai, )
Sole Proprietor of M/s. Shree Swami )
Samarth Construction, having address )
at Sixth Sence, Gokhale Road, Prabhadevi, )
Mumbai – 400 025 )
2. Sagar Shah, )
An adult of Mumbai, residing at Flat No. 1201, )
Tytan, Napean Sea Road, Mumbai – 400 026 )
3. Nikunj Mittal, )
The Managing Director of NNM Securities Pvt. Ltd. )

::: Uploaded on – 09/03/2018 ::: Downloaded on – 10/03/2018 01:11:06 :::
ssp 2 nmcdl-706 of 2017

having office at 1111, Stock Exchange Tower, Dalal )
Street, Mumbai – 400 023 )
4.Vivek Gangwal, )
An adult of Mumbai, residing at 302, Marathon )
Heights, P.B. Marg, Worli, Mumbai )
5. Mrs. Natasha Sagar Shah, )
An adult of Mumbai, residing at Flat No. 1201, Tytan )
Napean Sea Road, Mumbai – 400 026 )…Defendants

Mr. Mathew Nedumpara, instructed by Mrs. Rohini M/ Amin, for the Applicant.
Mr. S. Jagtiani, instructed by M/s. J.Law Associates, for the Plaintiffs.

CORAM: S. J. KATHAWALLA, J.
JUDGMENT RESERVED ON : 4th January, 2018
JUDGMENT PRONOUNCED ON : 5th March, 2018

JUDGMENT :
1. At this point of time, the Judiciary is mired in challenges of a very grave nature, perhaps like never before. It is being observed that there is, amongst some litigants and their Advocates, virtually no fear or hesitation in making false statements and misrepresentations before the Court, which should under any and all circumstances be dealt with the iron hand of the judiciary with zero tolerance for such blatantly unethical and mala-fide behaviour.

2. The dignity and respect of the Court along with its prescribed procedures is being unabashedly violated by certain litigants who are using foul and unfair means to demean and denounce the august Judiciary by making frivolous and ssp 3 nmcdl-706 of 2017 baseless allegations against the Judges, and/or their opponents and their Advocates, with a view to rescind and back-track on solemn undertakings and statements earlier made in Court. This malicious modus operandi of certain dishonest litigants is absolutely unacceptable, as it seeks to subvert the very foundations of justice that the Judiciary is committed to uphold. With no merit in their case, and in a bid to avert an unfavourable order being passed against them, such dishonest litigants collude with their Advocates to use underhanded means to ensure favourable orders and their consequent success in litigation instituted or defended by them.

3. Certain Advocates sadly seem to have forgotten the code of eithcs that enjoins upon all Advocates, that they are Officers of the Court first and Advocates of their clients only thereafter. It is anguishing to note that such Advocates facilitate the unethical misadventures of their clients, often encouraging their clients’ dishonest practices, causing grave stress to the Judiciary, and unfortunately bringing the entire judicial system to disrepute. It has become a vicious and despicable cycle wherein dishonest litigants with mala- fide intentions seek out unethical Advocates, who for hefty fee and the lure of attracting similar new and unscrupulous clients, conveniently choose to disregard and/or forget all ethics and the code of conduct enjoined upon this ssp 4 nmcdl-706 of 2017 august profession. It is with a heavy heart, that Courts at times note that clients have no hesitation in replacing good and honest Advocates, with unscrupulous ones, who go to any dishonest lengths, merely to secure favourable orders for their clients.

4. The present case and the conduct of the Defendant No. 1 / Applicant strongly affirms the aforesaid observations. The Defendant No.1 Shri Vilas Chandrakant Gaokar had through out the hearing of his case, remained present and appeared before the Court with his Counsel as well as the Advocate on record. He took the assistance of this Court in resolving his issues pertaining to the Suit, gave undertakings in pursuance of it, obtained consent orders and also acted in consonance with the same. However, Defendant No.1 breached one of the undertaking given by him and being fully aware of the consequences thereof, he craftily and quickly changed his Advocates ( who had already been previously changed) and briefed Counsel Mr. Mathew Nedumparra, who in turn advised him to file this Notice of Motion. In this Notice of Motion, he has stated that all the previous orders passed by this Court are null and void for reasons which are utterly false and dishonest to the knowledge of his client Shri Vilas Chandrakant Gaokar.

5. This malicious and mala-fide Notice of Motion sets out/alleges totally ssp 5 nmcdl-706 of 2017 baseless and contemptible allegations against this Court, which are completely unacceptable and are a mere shenanigan to circumvent the action of contempt of Court. This reprehensible attempt at intimidating and manipulating this Court into not taking any action under the Law of Contempt calls for censure in the strongest terms. In an attempt to cover up the mala-fide intent, which is crystal clear and amply evident, the litigant Shri Vilas Chandrakant Gaokar dishonestly/falsely reiterates in the Application that he holds the Court in the highest esteem and respects its integrity. It will not be out of place to mention here that in an earlier matter before me, in which Mr. Mathew Nedumpurra appeared for one of the parties, he, after repeatedly reiterating that he holds the Court in the highest esteem and respects its integrity, had proceeded to pray that I recuse myself from all the matters in which he appears. That Application was, however, rejected by a detailed Judgment dated 23 rd December, 2014, reported in 2015(2) Bom.C.R.247.

6. Therefore, such unethical and unacceptable behaviour needs to be met with the iron hand of the Court. The Courts must tackle all such unethical conduct fearlessly by taking stern action against litigants, and if need be their unethical Advocates as well. A failure to do so, will result in seriously jeopardising the Judiciary and will erode the Rule of Law, which is absolutely ssp 6 nmcdl-706 of 2017 integral to the justice system in the country. The Courts must act swiftly and firmly, without getting intimidated by false and frivolous charges, and utterly baseless, malicious and dishonest allegations that are levelled against the Judges.

7. I shall now proceed to deal with the above Notice of Motion taken out by Shri Vilas Chandrakant Gaokar (Applicant/Original Defendant No.1).

8. The above Notice of Motion is taken out by Defendant No. 1 Vilas Chandrakant Gaokar, for a declaration that the Orders dated 26 th April, 2017, 29th April, 2017, 12th May, 2017, 19th June, 2017, 26th June, 2017, 10th July, 2017, 18th July, 2017, 20th July, 2017, 25th July, 2017, 10th August, 2017, 24th August, 2017, 11th September, 2017, 18th September, 2017, 25th September, 2017 and 10th October, 2017, passed by me are all rendered void ab initio, vitiated by errors apparent on the face of the record and that the same should be recalled. Defendant No. 1 has also sought a declaration that this Court is not invested with the jurisdiction to embark upon the controversies which it has been called upon to decide, since it is not a Commercial Court within the meaning of Section 2 (1)

(b) of the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015 (Commercial Courts Act, 2015) and further for a declaration that the Suit is barred by limitation and that the issue of maintainability is liable to be decided as a preliminary issue.
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9. Relying on the Affidavit-in-Support of the Notice of Motion, Mr. Mathew Nedumpara, the Advocate for Applicant/Original Defendant No. 1 has submitted as under:

9.1 That the above Suit is a commercial suit within the meaning of Section 7 of the Commercial Courts Act, 2015. The case was for the first time placed on Board on 26th April, 2017. A notice of the said hearing was served on Defendant No. 1 on 22nd April, 2017. The Defendant No.1, as a layman, felt it only appropriate to consult a lawyer and felt that the case being of a civil nature, his presence was not required. The Court apparently relying on the submission of the Plaintiff passed an order directing that Defendant Nos. 1 to 5 be present in the Court on 28th April, 2017 at 11.00 a.m., and recorded that if they fail to remain present the Court shall pass necessary orders to ensure their presence before this Court including issuing a warrant of arrest. The Senior Inspector of the local Police Station was asked to assist the representative of the Plaintiffs and/or their Advocates to serve a copy of the order on the Defendants and obtain their acknowledgments. The Court, in the meantime, also restrained Defendant No. 1 from creating any third party rights in respect of any of the flats in his project, more particularly described in prayer clause (1) of the Plaint.

9.2 That on 28th April, 2017, when the Defendant No.1 appeared before

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the Court for the first time, he was threatened that he will be sent to jail. Therefore, he was terribly frightened. That is the reason he readily agreed to whatever came from the “mouth” of the Court. Even today, he is terribly frightened but he is reassured that he is before a Court of law and he commits no wrong in asserting his rights, and his fear is misplaced. His Counsel has infused in him some confidence and trust in the procedural protection which he is entitled in law.

9.3 That on 29th April, 2017, this Court was pleased to direct the Branch Manager of C.K.P. Co-operative Bank, Dadar Branch, Mumbai, to be present with the records on 3rd May, 2017, at 10.30 a.m., in Chambers along with the records of the account of Swami Samarth Medical Stores. The Court further directed that no third party interest shall be created in respect of Veg Always Hotel and/or any properties in which Defendant No. 1 has any interest. 9.4 That on 3rd May, 2017, the Bank Manager of C.K.P. Co-operative Bank, Dadar Branch and one Shri Mohan Chavan were present. 9.5 That Defendant No. 1 was relaxed that since the High Court had been closed for summer vacation, he could brief his lawyer leisurely. However, he was served with a notice by the Plaintiffs lawyer that he should be present in my Chambers on 12th May, 2017. Defendant No. 1, therefore, had to engage a ssp 9 nmcdl-706 of 2017 Counsel post haste. However, this Court, for reasons difficult to fathom, was pleased to record the undertakings on his behalf, as set out therein, and also recorded in the order that, “by consent the matter is treated as part-heard”. 9.6 That the Court was pleased to do so, on the request of the Counsel for the Plaintiffs. Any right thinking person would have entertained disturbing thoughts as to the integrity and honesty of this Court in passing orders/recording the proceedings of the Court as above. However, Defendant No.1 did not even in his wildest of dreams allow such thoughts to ever enter his mind. He has the greatest of faith in the integrity of this Court so also the highest of regard, in spite of the fact that he has been put to grave injustice by the aforesaid orders of the Court which has recorded as consent, things which were forced to be consented to out of sheer fear of the Court. Therefore, whatever is recorded and attributed to be the consent of the Defendant No.1 and undertaking given by him is what the Court made him agree upon.

9.7 That the recording that, “by consent, the matter is treated as part- heard”, and further hearing of the suit by me, amounts to an investiture of a jurisdiction on me by consent, which the law has not invested in me. The above Suit is a commercial suit instituted before the Commercial Bench of this Court by virtue of Section 4 of the Commercial Courts Act, 2015. When the above ssp 10 nmcdl-706 of 2017 Suit was listed before me on 26th April, 2017, 29th April,2017 and 3rd May, 2017, my Court was the Commercial Court Bench in terms of Section 4 of the Commercial Courts Act, 2017. However, on 12th May, 2017, I was not invested with any jurisdiction to hear any case much less the instant Suit, the Court being closed for mid-summer vacation on 6 th May, 2017. As per the Letters Patent Act/Bombay High Court Rules/Notifications only the Vacation Bench constituted by the Hon’ble the Chief Justice alone was invested of the jurisdiction to hear any matter whatsoever. As far as the information and knowledge of Defendant No.1 goes, the Hon’ble Chief Justice had not authorised me to hear any Commercial Suit within the meaning of Section 2 (1) (b) of the Commercial Courts Act, 2015, or the instant case in particular. 9.8 The Defendant No. 1 was made to agree to the Order dated 12 th May, 2017, which has recorded many undertakings and the consent of Defendant No.1. Therefore, the same is rendered void ab initio, being one at the hands of a Court which is invested with no jurisdiction whatsoever to hear the case. Therefore, my Court was a coram non judice in so far as the above case is concerned on 12th May, 2017, so too the various dates on which the above case was posted. The orders/proceedings of this Court dated 12 th May, 2017, 19th June, 2017, 26th June, 2017, 10th July, 2017, 18th July, 2017, 20th July, 2017, 25th ssp 11 nmcdl-706 of 2017 July, 2017, 10th August, 2017, 24th August, 2017, 11th September, 2017, 18th September, 2017, 25th September, 2017 and 10th October, 2017, and the undertaking and consent recorded therein are all rendered void ab initio. 9.9 That no Court or Tribunal could confer jurisdiction upon itself by consent of parties, however voluntary, bona fide and well meaning it could be, if the law has not conferred such jurisdiction upon it. The question of jurisdiction involved, in so far as the present Suit is concerned is substantive in nature. It is about the very competence and authority of this Court to hear the above case even after my Court ceased to be a Commercial Bench within the meaning of Section 2 (1) (b) of the Commercial Courts Act of 2015.

9.10 That the foundation, based on which this Court proceeded to hear the above case is the Order dated 12th May, 2017, which recorded that the case be treated as part-heard. To give full meaning to the word “consent” would mean consent given by Defendant No. 1 and/or his lawyer. Defendant No. 1 has not given any consent. He is not capable of giving any consent. He never understood the implication of the words, “by consent the matter is treated as part heard”. Even assuming that he understood the meaning of the said words, which certainly is not true, even then it is of no consequence since he is incapable of empowering this Court with jurisdiction which the law has not invested upon it.
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10. In support of the above submissions/contentions, Mr. Nedumpara has relied on the following decisions of the Hon’ble Supreme Court of India :

(i) Kiran Singh and others vs. Chaman Paswan and others 1 wherein it is held that a decree passed by a Court without jurisdiction is a nullity and that its invalidity could be set up whenever and wherever it is sought to be enforced or relied upon, even at the stage of execution and even in collateral proceedings. A defect of jurisdiction whether it is pecuniary or territorial or whether it is in respect of the subject matter of the action, strikes at the very authority of the Court to pass any decree and such a defect cannot be cured even by consent of parties.

(ii) State of Rajasthan vs. Prakash Chand and others 2 wherein it is held that a Judge shall exercise his powers within the bounds of law and should not use intemperate language or pass derogatory remarks against other judicial functionaries unless it is absolutely essential for the decision of the case and is backed by factual accuracy and legal provisions and that Judges must be circumspect and self-disciplined, in the discharge of their judicial functions. The virtue of humility in the Judges and the constant awareness that investment of power in them is meant for use in public interest and to uphold the majesty of the rule of law, would to a large extent ensure self-restraint in discharge of all judicial AIR 1954 SC 349 (1998) 1 SCC 1 ssp 13 nmcdl-706 of 2017 functions and preserve the independence of the judiciary.

(iii) Campaign for Judicial Accountability and Reforms vs. Union of India 3 wherein the Hon’ble Supreme Court has held that once the Chief Justice is stated to be the master of the roster, he alone has the prerogative to constitute Benches. Needless to say, neither a two Judge Bench, nor a three-Judge Bench can allocate the matter to themselves or direct the composition for constitution of a Bench.

(iv) Naresh Shridhar Mirajkar and others vs. State of Maharashtra and another4 wherein it is held that the High Court has inherent jurisdiction to hold a trial in camera if the ends of justice clearly and necessarily require the adoption of such a course. However, such inherent power must be exercised with great caution and it is only if the Court is satisfied beyond any doubt that the ends of justice themselves would be defeated if a case is tried in open Court that it can pass an order to hold the trial in camera.

11. The Plaintiffs have filed a detailed Affidavit setting out how the entire matter progressed before this Court, how Defendant No. 1 has suppressed the true and correct facts in his Application and how he has made statements in his Application which are false and incorrect to his knowledge. Mr. Sharan Jagtiani, the learned Advocate appearing for the Plaintiffs has pointed out that the Unreported order of the Hon?le Supreme Court of India in Writ Petition (Crl.) No. 169 of 2017 AIR 1967 SC 1 ssp 14 nmcdl-706 of 2017 Defendant No. 1, except for on day one i.e. 26 th April, 2017, has throughout remained present in Court and was duly represented by a Counsel as well as his Advocates/Attorney on record.

12. Mr. Jagtiani has submitted that not only are the submissions made by the Defendant No. 1 in his Affidavit in support of the Notice of Motion false and dishonest to his knowledge but the same are scandalous. He has submitted that Defendant No. 1 has made statements in his Affidavit suppressing the fact that after the hearing held before this Court on 3 rd May, 2017, there was a hearing before this Court on 9th May, 2017, which was amongst others, attended by Defendant No.1 as well as his Advocate. In fact, thereafter the parties including Defendant No. 1 and their Advocates have met the Plaintiffs and their Advocate and drafted Minutes of Order, which were forwarded by the Advocate for the Plaintiffs to the Advocate for the Defendant No. 1 on 11 th May, 2017 and thereafter all the parties and their Advocates, as decided on 11 th May, 2017 appeared before this Court on 12th May, 2017 and obtained an Order by Consent and also agreed that the matter be treated as part-heard before this Court. Mr. Jagtiani has submitted that despite there being documentary evidence in support of the above facts, Defendant No.1 has suppressed the correct facts and has instead alleged as follows :

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(i) That on 3rd May, 2017 after the Bank Manager of C.K.P.Co-op. Bank, Dadar Branch and one Shri Mohan Chavan, were present before this Court, the Defendant No.1 was relaxed that since the High Court is closed for summer vacation, he could brief his lawyer leisurely. However, he was served with a notice by the Plaintiffs lawyer that he should be present in my Chambers on 12th May, 2017. Defendant No. 1, therefore had to engage a Counsel post- haste. However, this Court, for reasons difficult to be fathomed, was pleased to record the undertakings on his behalf, as set out therein, and also recorded in the Order that, “by consent the matter is treated as part-heard”.

(ii) That the Court was pleased to record in the Order dated 12 th May, 2017 “by consent the matter is treated as Part-heard” on the request of the Counsel for the Plaintiffs. Any right thinking person would have entertained disturbing thoughts as to the integrity and honesty of this Court in passing orders/recording the proceedings of the Court as above.

(iii) Defendant No.1 is put to grave injustice by the orders of the Court which are recorded as consent, for things which were forced to be consented to out of sheer fear of the Court. Therefore, whatever is recorded and attributed to be the consent of the Defendant No.1 and undertaking given by him is what the Court made him agree upon.

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(iv) That the recording that, “by consent, the matter is treated as part- heard”, and further hearing of the Suit by this Court amounts to investiture of a jurisdiction on the Court by consent, which the law has not invested in the Court.

13. Mr. Jagtiani has submitted that even after 12th May, 2017, the matter appeared on my board on 12 occasions and was shown as “Part Heard” and several orders were passed by this Court, when Defendant No. 1 as well as his Advocates were present. Mr. Jagtiani has submitted that apart from the fact that the Advocate has implied authority of his client to enter into a compromise and an order passed by consent cannot be appealed and no review can be sought in respect thereof, the parties are estopped from withdrawing their consent. Mr. Jagtiani has submitted that stern action be taken against Defendant No. 1 for making incorrect statements, suppressing facts and making scandalous allegations against this Court. Mr. Jagtiani has submitted that the above Notice of Motion therefore, deserves to be dismissed with exemplary costs and this Court be pleased to initiate action against Defendant No. 1 for making false and incorrect statements on oath and for casting aspersions and scandalous allegations against this Court.

14. In support of the above submissions / contentions, Mr. Jagtiani has relied ssp 17 nmcdl-706 of 2017 on the following decisions :

(i) Kiran Narottamdas Merchant Vs. Ravindra Narottamdas Merchant 5 wherein the Division Bench of this Court comprising of Dr. D.Y. Chandrachud (as he then was) and S.C. Gupte, JJ, held that a judgment by consent binds the parties as effectively as a judgment delivered upon adjudication and hence constitutes an estoppel between the parties. Paragraphs 14 and 15 of the said Judgment are relevant and reproduced hereunder :

“14. The concept and consequence of a compromise decree was considered in a judgment of the Madras High Court in Raja Kumara Venkata Perumal Raja Bahadur vs. Thatha Ramasamy Chetty, 1911 21 MLJ 709. A judgment by consent of the parties constitutes more than a mere contract and is said to have sanction of the Court. Consequently, a judgment by consent has all the force and effect of any other judgment being conclusive as an estoppel upon the parties. The jurisdiction and powers of the Court to pass a decree by consent is, however, limited in the sense that the Court does not decide the disputes between the parties, but only embodies the decision of the parties and makes their decision as its own, giving it the force and solemnity of a decision of the Court. This principle has subsequently been adopted by the Supreme Court in Raja Sri Sailendra Narayanbhanja Deo vs. State of Orissa, AIR 1956 SC 346 at para 14. The same principle was enunciated 2014 (2) Mh.L.J. 395 ssp 18 nmcdl-706 of 2017 subsequently in Byram Pestonji Gariwala vs. Union Bank of India (1992) 1 SCC 31 where the Supreme Court held that a consent decree binds the parties and is as effective an estoppel between them. The same principle was followed by the Supreme Court in P.T. Thomas vs. Thomas Job., (2005) 6 SCC 478.
15. The principle of law is, hence, well settled. Where the Court delivers or pronounces a judgment by consent, what the Court does in effect is to place its imprimatur on a contractual arrangement between the parties. The agreement between the parties which forms the foundation of the judgment is contract nonetheless like any other contract. A judgment by consent, therefore, binds the parties as effectively as a judgment delivered upon adjudication and hence, it has been held to constitute an estoppel as between the parties.”
(ii) Lalit Kumar s/o. Purushottamdas Mohta vs. Official Liquidator, High Court of Judicature at Bombay, Nagpur Bench, Nagpur and Others 6 wherein the Division Bench of this Court comprising of D.D. Sinha and K.J. Rohee, JJ., (as they then were) held that the impugned order is a consent order and therefore the Appellant and Respondent No. 3 are estopped from making grievance thereof since both of them by necessary implication waived their right to question the propriety and legality of such order.

(2004) 2 Mh.L.J. 457

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(iii) Govindarajan and Others vs. K.A. N. Srinivasa Chetty and others 7,

wherein the Madras High Court held that an Advocate appearing for a party always has an implied authority to enter into a compromise on behalf of his party. The relevant portion of paragraph 7 of the said Order is reproduced hereunder :

“7. …….. It was not the case of the defendants in this case that the compromise itself was opposed to public policy or contrary to law. It was only stated that the same is voidable at their instance because of fraud and coercion. The Court below could not have, therefore, refused to record the compromise on that ground. The learned Counsel is also not well-founded in this contention that because the Advocate had executed the compromise on behalf of his client, it is not valid in law. In another decision reported in Madras Co-operative Printing and Publishing Society Limited, Madras represented by its Secretary v. O. Ramalingam and others, have held following the decision of the Supreme Court in C.A. No. 43 of 1968, that an advocate appearing for a party always has an implied authority to enter into a compromise on behalf of his party. The only limitation is if there was any written prohibition or limitation, he will have to act within that prohibition or limitation. The learned counsel for the appellants in this case is not able to point out any such limitation on the authority of the Advocate to enter into the compromise in this case. We have, therefore, to proceed on the basis that there was a legal and valid compromise between the parties.”

AIR 1977 Mad 402

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15. Before I proceed to set out how the matter proceeded before me, I would at the outset like to make it clear why the Order dated 26 th April, 2017 was passed, why the matter was kept on some occasions in Chambers and why it cannot be alleged that I was not invested with jurisdiction to hear any case, much less the instant Suit, since the Court was closed for mid-summer vacation on 6 th May, 2017 upto 5th June, 2017, and thereafter.
16. As set out in the orders passed by me in several matters, a majority of the fresh suits filed before me and the ad-interim applications made before me for urgent ad-interim reliefs, pertain to matters in which the builders/developers promise to sell/allot ownership flats and after collecting crores of rupees cheat such flat purchasers, by not only not carrying out/completing the construction as promised, but by creating third party rights in respect of the same flats promised to be sold, in favour of other purchasers. I have also observed in such matters that some of the developers/builders despite being given notice of an application before the Court seeking urgent reliefs, they neither appear before the Court by themselves nor through their Advocates in order to avoid making any statements before the Court with regard to the suit premises and/or the suit project. The motive behind not appearing before the Court is to buy time to create a defence which includes creating documents in the form of allotment letters, etc., as ssp 21 nmcdl-706 of 2017 would suit them. Such builders/developers also do not care if any ex-parte orders of injunction are passed against them in their absence because they are aware that they will defeat any orders passed by the Court by appearing on the adjourned date, give some excuse for their non- appearance, produce documents that they have subsequently created and on the strength thereof, contend that third party rights are already created in respect of the subject premises/project. Keeping this modus operandi in mind, and in order not to give any opportunity to such litigants to play such games with the Court and defeat the ends of justice, I ensure their presence by passing an order requiring them to remain present immediately within a day or two, with a warning that if they breach the order, the Court shall be constrained to pass necessary orders to ensure their presence before the Court, including issuing a warrant of arrest. To further ensure that the order reaches the concerned Defendant by hand-delivery and is accepted by such Defendant, because many a times they brazenly refuse to accept service, I also direct the local police station to assist the Plaintiff in serving a copy of the order and obtain an acknowledgment of the erring party. Therefore, as set out hereinabove, such orders are passed to prevent a dishonest party from playing such games with the Court to defeat the ends of justice.

17. In the instant case, on 26th April, 2017, an application was made before ssp 22 nmcdl-706 of 2017 me by the Plaintiffs and it was pointed out to me that the Plaintiffs have been cheated by Defendant Nos. 1 to 5 by collecting an amount of Rs. 9.5 crores and allotting flats in a building known as Samarth Heights in Dadar (which were really intended as security for an admitted debt) without disclosing that the flats were already sold to third parties. In order to point out that the Plaintiffs are not the only individuals who are cheated by the Defendant No.1 and in support of the submission that he is a habitual fraudster, I was informed that Defendant No.1, Shri Vilas Chandrakant Gaokar, has cheated and duped various other gullible persons by selling flats in the same building by collecting substantial funds from them and after carrying out some initial construction, the construction work is brought to a halt. It was also pointed out that Defendant No.1 has also cheated the tenants who vacated their old tenements and have handed over possession of the same to Defendant No.1 for redevelopment work. He has not only not provided them with the new flats as promised, but has also not paid to them the rent promised in lieu of temporary alternate accommodation, thereby virtually bringing them on the streets. I was informed that some of the tenants have approached the Court and the proceedings are pending. In view of the said submissions and being conscious of the fact that though the intimation of the Application seeking urgent ad-interim orders to be made on 26 th April, 2017 was ssp 23 nmcdl-706 of 2017 received by Defendant Nos.1 to 5 on 22 nd April, 2017, none of the Defendants have bothered to remain present in Court on 26 th April, 2017 by themselves and/or through their Advocates despite the matter being shown on board on that day for urgent ad-interim reliefs, this Court therefore proceeded to pass the Order dated 26th April, 2017, the contents of which are set out hereinabove. The Order dated 26th April, 2017 has not caused any prejudice to any of the Defendants. The Defendants and/or their Advocates including Defendant No.1 Shri Vilas Chandrakant Gaokar and his earlier Advocates, who have been regularly appearing before this Court since 28th April, 2017, have not made/raised any grievance/objection with regard to the said Order dated 26 th April, 2017 and a grievance/objection is now made/raised for the first time on 28th October, 2017 by Defendant No.1 only to wriggle out of an undertaking given by him much after 26th April, 2017, which I will hereinafter explain in detail. The Defendant No.1 has, even at this stage, not raised the objection/grievance through his earlier Advocates, knowing fully well that they will not agree to be a party to his dishonest design of filing an Affidavit based on falsehood with the dishonest intention to wriggle out of an undertaking recorded by consent in the Order dated 12th May, 2017. Defendant No.1 Vilas Chandrakant Gaokar, therefore, discharged his earlier Advocates and has thereafter, brought Ms. ssp 24 nmcdl-706 of 2017 Rohini Amin, Junior/colleague of Mr. Mathew Nedumpara on record and through her has briefed Mr. Mathew Nedumpara as a Counsel, to interalia raise the grievance/objection with regard to the Order dated 26 th April, 2017 by filing the present Notice of Motion only on 28 th October, 2017. The Order dated 26 th April, 2017 is, therefore, passed in the interest of justice and the question of taking cognizance of the grievance/objection of Defendant No.1 with regard to the same, or to recall the said Order as prayed for by Defendant No.1, does not arise and is rejected.

18. Defendant No. 1 and his Counsel Mr. Nedumpara have admitted that when the Orders dated 26th April, 2017, 28th April, 2017 and 3rd May, 2017 were passed by this Court in the above matter, the Hon’ble the Chief Justice had assigned commercial matters to me and that my Bench was a Commercial Court Bench in terms of Section 4 of the Commercial Courts Act, 2015. However, Mr. Nedumpara submitted that on 12th May, 2017, I was not invested with any jurisdiction to hear any case much less the instant Suit, since the High Court was closed for summer vacation on 6th May, 2017 and so far as their information and knowledge goes, I was not authorised to hear any commercial suit within the meaning of Section 2 (1) (c ) of the Commercial Courts Act, 2015 or the instant case in particular. Though I am not in favour of setting out the extent of judicial ssp 25 nmcdl-706 of 2017 work done by me in the past about 10 years, only for the sake of placing on record the correct facts, I am constrained to mention, much against my wish that during all these years, I do not remember having taken a single day off during any of the vacations, be it Diwali, Christmas or Summer. I have either worked as a Vacation Judge or have worked on matters which were before me prior to the vacation. I have during vacations also placed matters which were heard by me prior to the commencement of vacations. All this is done only after seeking permission of the Hon’ble the Chief Justice. Infact, in April-May, 2017, the Hon’ble the Chief Justice had, pursuant to the request of the Hon’ble Chief Justice of India, requested the Judges of this Court to come forward and voluntarily hear pending matters at least for one week during the ensuing summer vacation of four weeks. I had informed the Hon’ble Chief Justice that, as in the past, I will be working and taking up matters during all the four weeks and that I should be allowed to take up matters during the period from Sunday, 7 th May, 2017 to Sunday, 4th June, 2017 as per the extant assignment of my judicial work with effect from 27th March, 2017 including matters for pronouncement of judgments and orders. I had also issued oral directions to the Registry to obtain orders from the Hon’ble the Chief Justice in this regard. In view thereof, on 4 th May, 2017, the Master and Assistant Prothonotary (Judicial) placed a written ssp 26 nmcdl-706 of 2017 submission before the Hon’ble Chief Justice seeking permission to list matters before me during the summer vacation from Sunday 7 th May to Sunday 4th June, 2017 as per the extant assignment of judicial work w.e.f. 27 th March, 2017, including matters for pronouncement of judgments/orders. The Learned Chief Justice had, on 4th May, 2017, itself, granted written permission in this regard. It is on the strength of this permission received from the learned Chief Justice that several matters were heard by me including commercial matters (since my assignment of judicial work w.e.f. 27th March, 2017 included matters under the Commercial Courts Act) and the above matters were also entertained by me on 9th and 12th May, 2017. In fact, on 12 th May, 2017, the matter was not on my Board, but since the Advocates for the Plaintiffs as well as the Defendants including the Counsel and Advocates representing the Defendant No.1 were aware that I was continuing with my earlier assignment during the entire vacation, they mentioned the matter before me in Chambers and sought orders by consent, when Defendant No. 1 was also present. During the summer vacation, 30 matters were finally disposed off by me which included final disposal of 11 regular suits as well as commercial suits, final disposal of 15 Notices of Motion in Commercial Suits, final disposal of one Arbitration Application and final disposal of three Misc. Applications. Apart from the said ssp 27 nmcdl-706 of 2017 30 matters disposed of by me, 40 matters had remained part-heard and if the same would not be treated as part-heard upon reopening of the Court on 5 th June, 2017, the entire exercise of proceeding with the matters during court vacations would be futile. Therefore, the parties through their Counsel/Advocates on their own requested the Court that their matters be treated as part-heard. On 12th May, 2017, the Advocates for the parties in the above matter including the Advocates for Defendant No. 1 also requested the Court to treat their matters as part heard. Again, the Defendant No.1 being aware that he has made false and incorrect statements in the Affidavit in support of his above Notice of Motion and his earlier Advocates will not support his dishonest stand, has changed his Advocates and dishonestly contended, through Mr. Mathew Nedumpara, that it was at the instance of the Plaintiffs that this Court recorded that by consent the matter be treated as part-heard, and that he had not given his consent. Though it is true that my regular assignment from June, 2017 did not pertain to commercial matters, a statement showing the disposal of the 30 matters finally disposed of and the balance matters which were heard and treated as part-heard by me, by consent of the parties was prepared by the Section Officer, Statistics Department which was subsequently handed over to the Registrar, Judicial-I, who forwarded the same to the Learned Chief Justice. In the said statement forwarded to the ssp 28 nmcdl-706 of 2017 Learned Chief Justice, even the dates fixed by me for hearing of the matters treated as part-heard, including the dates fixed in the above matter after re- opening of the Court on 5 th June, 2017, are also mentioned. After the Court re- opened, Defendant Nos. 1 to 5, along with their Advocates, appeared before me on 12 different dates of hearing and several orders were passed by me in the matters without any party or the Advocates representing them making any grievance. As stated earlier, it is only when the Defendant No. 1 wanted to wriggle out of his undertakings that he discharged his earlier Advocates who were aware of the true and correct facts in the matter and instead briefed Mrs. Rohini Amin and Mr. Mathew Nedumpara to make the above Application, by suppressing facts, and on grounds which are false and dishonest to his knowledge.

19. After the Order dated 26 th April, 2017, was served on Defendant Nos. 1 to 5, the manner in which the matter has progressed is set out in detail by the Plaintiffs in their Affidavit-in-Reply and in their submissions at the hearing of this Notice of Motion. The same is referred to hereinafter. It is pertinent to note that Defendant No. 1 has in his Rejoinder reiterated his allegations and made a general denial, but has not specifically dealt with the facts set out in the Affidavit in Reply. Even during his arguments Mr. Nedumpara has not ssp 29 nmcdl-706 of 2017 submitted that what is stated by the Plaintiffs in the Affidavit in Reply is incorrect.

20. On 28th April, 2017, Defendant No. 1 was personally present in Court along with the Counsel as well as his Advocate on record. This Court made it clear to the Advocates appearing for the Defendants that it will be in the interest of the Defendants to briefly disclose all the facts before the Court pertaining to the construction of the building and the third party rights already created by the Defendants in respect of the Suit Flats much before accepting the sum of Rs.9.5 Crores from the Plaintiffs. This Court also made it clear to the Advocates for the Defendants that the Defendants be informed as to what the consequences would be if the disclosure made by them turns out to be untrue. If this is perceived as a threat by any party, so be it. Defendant No. 1, through his Advocate, admitted having received a sum of Rs. 9,50,00,000/- from the Plaintiffs in lieu of allotting 7 flats in Samarth Heights. He also admitted that he had already sold the Suit Flats to other parties/purchasers prior to their allotment in favour of the Plaintiffs. In view of the above admission, Defendant No.1 agreed to return the amount of Rs.9,50,00,000/- with interest to the Plaintiffs within 12 months. A request was made to this Court on behalf of Defendant No.1 to urge the Plaintiffs not to insist on the agreed interest @ 36% p.a. but to reduce the same. Since ssp 30 nmcdl-706 of 2017 Defendant No.1 volunteered to settle the matter and agreed to pay the amounts due to the Plaintiffs, this Court requested the Advocate for the Plaintiffs to reduce/accept interest @ 15 percent per annum instead of the agreed rate of 36% p.a., which they agreed and the Defendant No.1 also accepted the same. After this agreement/settlement, it was suggested that, the Defendant No.1 to show his bonafides should arrange for at least Rs. One Crore and also provide some security to ensure the balance payment. At this stage, despite Defendant No.1 being represented by a Counsel as well as the Advocates on record, Defendant No.1 himself came forward and addressed the Court. He voluntarily informed the Court that since he was facing financial problems, he will need some time to arrange for Rupees One Crore. He submitted that he can forthwith pay Rs.25 lakhs to the Plaintiffs towards part payment. Defendant No. 1 requested that the matter be kept on 29th April, 2017 to enable him to give his proposal qua the return of the amounts received from the Plaintiffs with interest @ 15% p.a. and to also offer security for repayment of the entire amount. This Court acceded to the request of the Defendant No.1 and adjourned the matter to 29 th April, 2017, despite it being a Saturday. Defendant No.1 has in his above Notice of Motion, in a clear attempt to supress relevant facts, not made a whisper about what transpired in Court on 28th April, 2017.

ssp 31 nmcdl-706 of 2017

21. On 29th April, 2017, Defendant No. 1 was present in my Chambers along with the Counsel who was instructed by his Advocates on record. Defendant Nos. 2 and 4 were also present with their Advocates. The Counsel for Defendant No.1, on instructions, informed the Court that Defendant No. 1 intends to repay some portion of the amount due to the Plaintiffs by sale of his medical shop at Parel, and shall pay the balance amount within 12 months, and in the interim offered his restaurant premises at Parel named ‘Veg Always’ as security for repayment of the balance amount. Defendant No. 1 despite being represented by his Counsel once again came forward and informed the Court that his medical shop is attached by CKP Bank for non-payment of its dues and there is a buyer named Wellness Group who is negotiating with him to buy his medical shop. He urged the Court to help him in his hour of need by requesting the Bank to accept its dues by way of One Time Settlement (‘OTS’) and raise the attachment on his shop so that he could sell the shop and from the consideration received therefrom, he could resolve his monetary problems. This Court was of the view that though Defendant No. 1 has taken a huge amount from the Plaintiffs and has offered them flats towards security which were already sold by him to third parties, since he is now expressing remorse and is making a genuine attempt to settle the matter, and further keeping in mind that if the financial ssp 32 nmcdl-706 of 2017 problems of Defendant No.1 are solved, he will be able to complete his project, which in turn will help all flat purchasers who must be waiting to get possession of their ownership flats. Therefore, keeping this in mind, this Court, strictly on sympathetic grounds and only with the intention of helping out the Defendant No.1, acceded to his request and by its Order dated 29 th April, 2017 adjourned the matter to 3rd May 2017 and directed the Bank’s representative to remain present. This Court also directed Defendant No.1 not to create third party rights in respect of the Restaurant and/or his other properties, and to produce his income tax returns. The Advocate for Defendant No.1, on instructions from Defendant No. 1 requested the Court to keep the matter in Chamber on the adjourned date since they did not want to negotiate with the Bank in open Court and also did not want to openly discuss the figure at which they would agree to sell their medical shop which was attached by the bank and thereafter kept closed.

22. It appears that after the hearing before this Court on 29 th April, 2017 and before the next adjourned date i.e. 3rd May, 2017, certain discussions had taken place between the Advocates for the Defendant No.1 and the Advocates for the Plaintiffs, when the Advocates for the Plaintiffs were informed by the Defendant No.1/his Advocates that the medical shop is not an ownership ssp 33 nmcdl-706 of 2017 premise of Defendant No.1, but was given by the landlord on tenancy basis to Swami Samarth Medical and General Store, which is a partnership firm of Defendant No.1. However, Defendant No.1 had an understanding with the landlord under which he had orally consented for sale of the said shop.

23. In view thereof, on 2nd May, 2017, the Advocate for Defendant No. 1 sent an email to the Plaintiffs’ Advocate from the email ID of Rahul Gaokar (son of Defendant No.1) recording as follows :

“Pursuant to our hearing in the Chambers of Justice S.J.Kathawalla on 29th April, 2017, we discussed as follows :
(i) The medical shop situated at Supariwala building, Opp. KEM Hospital, Parel, is given on Tenancy basis (?agadi to Shree Swami Samarth Medical and General Store, a partnership firm of Defendant No.1;
(ii) The aforementioned shop is not on ownership basis. However, my clients i.e. Defendant No.1 has an understanding with the landlord Mr. Supariwala under which he has orally consented for selling of the said shop. My clients’ will try and keep him present in Court on Wednesday at 10.30 a.m. The aforementioned details are by and for the purposes of clarification and record what was discussed with you and other Defendants. The aforementioned facts were immediately conveyed to you by our counsel and we undertake to inform this fact to the Hon’ble Bombay High Court on Wednesday i.e. 3 rd May, 2017 when the ssp 34 nmcdl-706 of 2017 matter is listed.

This is for your information and record.”

24. The email therefore shows that the parties and their Advocates were also having discussions on days when the matters were not before me, to work out the modalities of settlement i.e. to sell the shop secured in favour of CKP Bank and solve the financial problems of the Defendant No.1. However, not a whisper is made about these facts in the Affidavit in support of the above Notice of Motion.

25. On 3rd May, 2017, Defendant No. 1 along with his Counsel and Advocates on record were present before me. The Advocate for the Plaintiffs and the respective Advocates for the Defendant Nos. 2 and 4 were also present. The Advocate for CKP Bank informed the Court that the Defendant No. 1 has defaulted in making payments as agreed qua his several facilities / accounts with the CKP Bank and the Defendant No.1 has also defaulted in making payments under the OTS Scheme of the Bank with regard to Account No.227 in respect whereof the medical shop / premises is held as security by the Bank. This Court requested the Bank to suggest a reasonable figure to settle Account No.227, to enable the Defendant No.1 to pay the agreed amount and get his security (medical shop) released, which will be of help not only to the Defendant No.1, ssp 35 nmcdl-706 of 2017 but also the Plaintiffs and the other flat purchasers. The Counsel for CKP Bank requested for some time to take instructions and agreed to revert on the adjourned date. The matter was therefore posted to 9 th May, 2017, when the Officers of CKP Bank were directed to remain present after taking instructions from their Board.

26. Between 3rd May, 2017 and 8th May, 2017, Defendant No. 1 handed over documents pertaining to Veg Always Property to the Plaintiffs for due diligence.

27. On 9th May, 2017, the Authorised Officers of CKP Bank, Dadar Branch i.e. Vice-Chairman Mr. Anand Bhosale, Director Mr. Prakash Shinde and General Manager Mr. M. Dhaimodkar were present. Defendant No. 1 was also present along with his Counsel. Defendant Nos. 2 to 4 were also present along with their respective Advocates. The Officers of the Bank informed the Court as well as those present that the total dues of the Bank from Defendant No. 1 in respect of the said Account No. 227 was Rs. 7 crores and that they had offered OTS of Rs. 4.34 crores, but Defendant No. 1 defaulted and the OTS lapsed. They further informed the Court that they had earlier valued the medical shop at Rs. 3.25 crores. Though they had recently not obtained a valuation report, according to them, considering the current market scenario, the said shop ssp 36 nmcdl-706 of 2017 would at least fetch an amount of Rs.5.25 Crores and thus if Defendant No.1 deposited Rs. 5.25 crores in Court, the Bank can consider settling Account No.227 and release the medical shop for sale. On that day, Defendant No. 1 also handed over a demand draft of Rs. 25 lacs to the Plaintiff’s lawyers. He further assured that he would pay the remaining Rs. 75 lacs within a month. Defendant No. 1 has not disclosed in his Affidavit in support of the above Notice of Motion that the matter was adjourned to 9 th May, 2017, or what transpired on 9th May, 2017.

28. It is pointed out by the Advocate for the Plaintiffs that after 9 th May, 2017, meetings were held with the Plaintiffs, their Advocate, Defendant No.1 and his Counsel to draft settlement terms. This fact is suppressed from the Court. Thereafter Defendant No.1 changed his Advocate and engaged M/s. Kochar and Company which firm continued instructing the same Counsel.

29. It is further pointed out by the Plaintiffs that on 11 th May, 2017, a meeting was held in the office of the Advocate for Defendant No. 1 – Kochar & Co., to finalise the draft minutes of order, pursuant to the settlement proposed by Defendant No.1. Plaintiff No. 1 and Defendant No. 1 were also present in that meeting. The minutes of the proposed consent order were prepared and agreed upon and since the Bank had agreed to release the medical shop before this ssp 37 nmcdl-706 of 2017 Court, it was mutually decided to mention the matter before this Court on 12 th May, 2017 and file the same. In view thereof, the Plaintiffs’ lawyers vide their email dated 11th May, 2017, addressed to the Advocate for the Defendant No. 1 specifically recorded that the matter shall be mentioned as agreed in the joint meeting. The letter dated 11th May, 2017 forwarded by the Advocates for the Plaintiffs to the Advocate for Defendant No. 1 reads thus:

“We are concerned for the Plaintiffs abovenamed. As agreed today in your office, the captioned matter will be jointly mentioned tomorrow at 11.00 am before the Hon?le Mr. Justice S.J. Kathawalla presiding in Chamber No. 11, Ground floor, High Court, main building.
You are therefore requested to ensure presence of your client Mr. Vilas Chandrakant Gaonkar (Defendant No.1) along with Mr.Vipul Shah.”
In fact, Mr. Jagtiani, the learned Advocate for the Plaintiffs has pointed out that in the late evening on the same day i.e. 11 th May, 2017, the Advocate for the Plaintiffs interalia forwarded to the Advocate for the Defendant No.1 by email, the modified draft order to be presented before me on 12 th May, 2017 in Chambers.

30. All these facts, including the fact that the Defendant No.1 and his ssp 38 nmcdl-706 of 2017 Advocates had a meeting with the Plaintiff No.1 and his Advocates and prepared a draft order on 11th May, 2017 and also decided to appear before me in my Chambers on 12th May 2017 and the fact that a letter dated 11 th May, 2017, was received by the Advocate for the Defendant No. 1 from the Advocates for the Plaintiffs and that by an email dated 11 th May, 2017, the Advocates for the Plaintiffs had forwarded to the Advocates for Defendant No. 1, a modified draft order to be presented before me on 12 th May, 2017 in Chamber, are suppressed in the above Application.

31. Instead a dishonest attempt is made by Defendant No.1 to blame this Court by stating in the Affidavit that, “on 3rd May, 2017, myself, the Bank Manager of the Branch Manager of C.K.P. Co-operative Bank, Dadar Branch so too one Shri Mohan Chavan were present. …….. while I was rather relaxed that I need to brief my lawyer leisurely since the High Court had been closed for the summer vacation I was served with a notice by the Plaintiffs lawyer that I need to be present in Chambers on 12.05.2017 of Hon’ble Justice S.J. Kathawalla. I therefore had to engage a counsel post haste.”

32. In order to make out a false case and hurl false accusations against the Plaintiffs and this Court, Defendant No. 1 also forgot that admittedly on 3 rd May, 2017, the matter was adjourned to 9 th May, 2017 i.e. during the summer vacation, ssp 39 nmcdl-706 of 2017 on which day he was present in Court along with his Advocates.

33. On 12th May, 2017, the matter was mentioned before me in my Chambers by the Advocates for the parties including the Advocates for the Defendant No.1. Amongst others, Defendant No.1 had also accompanied his Advocates in my Chambers. Upon mentioning of the matter, the same was taken on Board. The Advocates for the parties produced draft minutes of the consent order and requested me to pass an order by consent as agreed by the parties in the said minutes. The parties including Defendant No.1 were asked by me to go through the minutes in my presence and confirm whether they were agreeable to the same and whether an order be passed in terms thereof. Defendant No. 1 along with Defendant No. 2 (Sagar Shah) and Defendant No. 4 (Vivek Gangwal), who stood as Guarantors for Defendant No. 1, went through the minutes in my presence, confirmed its contents and submitted that an order be passed in terms thereof. Thus, in the presence of the parties and their respective Advocates, the Consent Order dated 12th May, 2017 came to be passed. As the Consent Order required various steps to be taken for its compliance, including steps to be taken by third parties such as CKP Bank, the landlords of the medical shop, the proposed buyers/purchasers of the medical shop, the parties before the Court mutually agreed and through their Advocates, made a request that the matter be ssp 40 nmcdl-706 of 2017 treated as part-heard before me. It was therefore recorded in the Order that, “by consent the matter is treated as part-heard”.

34. The Defendant No. 1 has once again suppressed all these facts in his Affidavit-in-Support of the Notice of Motion and after reproducing certain portions of the Consent Order dated 12 th May, 2017, dishonestly contended that the same have been recorded by the Court for reasons which are difficult to fathom. Defendant No.1 has further dishonestly alleged that he had not given any undertakings, nor had he given any consent and that the said undertakings/consent were given because I (the Court) made him agree to or undertake the same. Defendant No.1 has also stooped to the extent of alleging that any right thinking person would have entertained disturbing thoughts as to the integrity and honesty of this Court in passing orders/recording the proceedings. At the cost of repetition, it is pertinent to note that the above allegations are made against me by the Defendant No.1 despite there being documentary evidence available by way of emails that the draft consent order was ready with the Advocates for the Plaintiffs and the Defendants on 11 th May, 2017, and they had by written communication agreed to mention the matter before me on 12th May, 2017 (despite the matter not being on my Board/Cause List), and present the same before me, which as stated hereinabove, they infact ssp 41 nmcdl-706 of 2017 did and obtained the Consent Order dated 12th May, 2017.

35. Matters did not rest with the Consent Order of 12 th May, 2017. All parties and in particular Defendant No. 1 acted upon and in furtehrance of the Consent Order. The steps taken by Defendant No.1 and the other parties pursuant to the Order dated 12th May, 2017, are set out hereunder:

(i) Duplicate share certificates of landlord and tenant companies were issued and share transfer documents were executed in compliance with the Consent Order dated 12th May, 2017, by Defendant No.1;

(ii) The transfer of shares in both companies was done (stamp duty paid by the Plaintiffs as per the Order) and ROC records were updated to reflect the share transfer in favour of the Plaintiffs.

(iii) Mr. Vipul Shah, balance 50% shareholder of the landlord company also signed an NOC Affidavit consenting for the arrangement under the Consent Order dated 12th May, 2017.

(iv) Defendant No. 1 executed an Affidavit and an Indemnity, indemnifying the Plaintiffs against the liabilities of the landlord and tenant companies;

(v) Letters written by lawyers of Defendant No. 1- Kochar & Co. to Plaintiffs’ lawyers, recording various compliances.
ssp 42 nmcdl-706 of 2017

(vi) Kochar & Co. by letter dated 8th June, 2017, forwarded the draft of the

Leave and License Agreement signed by Defendant No. 1 and other parties in respect of the restaurant Veg Always as directed in the said Order dated 12 th May, 2017.

(vii) Since the relevant details in the Leave and License Agreement were not filled in and the same was inadequately stamped, the said Agreement was returned to Kochar & Co. for taking necessary steps to complete the same as per law. The execution and registration of the said Agreement is pending till date.

36. On 13th June, 2017, the matter was shown on my Board at item No. 904 under the caption “Part Heard”. On that day, Defendant No. 1 who was present in Court informed the Court through his Advocate that Wellness Group was no more interested in buying the medical shop and that he is looking for another buyer. The matter was therefore adjourned to 19 th June, 2017.

37. On 19th June, 2017, Defendant No. 1 introduced another buyer, one Mr. Abrol who made an offer of Rs. 12 crores. He was present in Court and requested for the original title papers in order to carry out his due diligence and he also expressed a desire to give public notice inviting objections against the proposed sale. Pursuant thereto, this Court directed CKP Bank to bring all the ssp 43 nmcdl-706 of 2017 original papers of the medical shop to the Court so that the proposed buyer can take inspection and copies. The matter was therefore adjourned to 22 nd June, 2017.

38. On 22nd June, 2017, the matter was again listed on my Board at Sr. No. 902 under the caption Part Heard On that day, the lawyer for CKP Bank informed the Court that as per procedure, before releasing the security i.e. the medical shop, the Bank has to notify the Guarantors whether they wish to buy the security or have any objections if the security is sold for Rs. 5.25 crores and thus the matter came to be adjourned till expiry of the notice period for calling offers from the Guarantors. The matter was therefore adjourned to 26 th June, 2017.

39. On 26th June, 2017, the Advocate for CKP Bank informed the Court that since no offers/objections were received from the Guarantors, the medical shop can now be released from the Bank’s attachment upon payment of its dues of Rs. 5.25 crores, from the consideration to be received from the buyer. All three Partners of Defendant No. 1 in Shree Swami Samarth Medical Stores (in whose name the tenancy of the medical shop stood) were present in Court and gave NOC for release of the medical shop from the Bank attachment and for its sale in favour of the proposed buyer. The matter was therefore adjourned to10th July, ssp 44 nmcdl-706 of 2017 2017.

40. On 10th July, 2017, Defendant No. 1 informed the Court that the second buyer Mr. Abrol had backed out and produced another buyer i.e. one D- force Electro Werke Pvt. Ltd. who was represented by an Advocate and Counsel. The new buyer through his lawyer made an offer of Rs. 7 crores for buying the medical shop. Since the said buyer was also introduced by Defendant No. 1 and quoted half the price quoted by the Wellness Group, it was apparent that the buyers were not acting or purchasing the property on an arm’s length basis. The Court thus directed Defendant No. 1 not to deal with the said shop. The matter was therefore adjourned to 18th July, 2017.

41. On 18th July, 2017, pursuant to the Order dated 10 th July, 2017, the offer by the new buyer D-force Electro Werke Pvt. Ltd. was revised to Rs.8 crores. The price was sought to be justified by the new buyer on the grounds that since the property was tenanted and disputed, the price fetched was low. A notice was also issued to the representatives of the Wellness Group to appear before the Court.

42. On 20th July, 2017, a notice was issued by this Court to the representative Mr. Vinay Sharma of the new buyer D-force Electro Werke Pvt. Ltd., to remain present in Court.

43. On 24th July, 2017, the new buyer of D-force Electro Werke Pvt. Ltd. through its authorised representative and the authorised person from the Wellness Group appeared before this Court. At that hearing they placed their respective offers and since the new buyer then revised its quote to Rs. 8.5 crores, which was more than the offer of the Wellness Group which stood at Rs.8 crores, the offer of the new buyer was confirmed and expressly consented to by Defendant No.1. Mr. Sopariwala, Landlord of Sopariwala Building gave his consent to convert the tenancy rights into ownership rights of the medical shop in the name of the new buyer upon payment of Rs.70 Lakhs.

44. By Orders dated 25th July, 2017, 10th August, 2017 and 24th August, 2017, by consent of the parties, the distribution of consideration of Rs. 8.5 crores by the new buyer to the Bank, landlords and plaintiffs came to be recorded. All 3 Partners of Shree Swami Samarth Medical Stores gave their no objection for the directions recorded in the Order. The Partners of M/s. Sopariwala Enterprises also gave their NOC to transfer ownership rights of the medical shop in favour of the new buyer. By consent the Court inter alia recorded how the balance consideration was to be paid by the new buyer to the Plaintiffs and how the transaction qua the finalization of the sale of the medical shop was to be completed, by executing the necessary transfer documents in favour of the new ssp 46 nmcdl-706 of 2017 buyer.

45. As the payment of the balance sum, out of the consideration received on sale of the medical shop to the Plaintiffs was done by the new buyer as per the directions in the Order dated 24 th August, 2017, this Court by its Order dated 11 th September, 2017 recorded these facts.

46. On 12th May, 2017, this Court had by consent inter alia passed the following Order :

“xi. Defendant No.1 further states that Company No. 2 had given the said Units on leave and license to his own partnership firm in the name and style of Shree Swami Samarth Hotel (?aid Firm who has been and is presently carrying on business of restaurant named ?eg Alwaystherefrom. The said firm has Defendant No. 1 (holding 75% share) and one Mr. Sanjay Chandrakant Gaonkar (the brother of Defendant No. 1, who is holding 25% shares) as partners. However, the said license has not been extended after the year 2013. Defendant No. 1 agrees that the Plaintiffs (through the said Company No. 2 and as shareholders thereof ) shall enter into leave and license agreement with the said firm for a period of 12 months and collect the license fee and adjust the same against the Plaintiffsclaim (in respect of the interest on the balance principal) against him. The statements are accepted and recorded as undertaking given to this Court.”
Defendant No.1 who had by now achieved what he wanted i.e. to get his medical ssp 47 nmcdl-706 of 2017 shop released by making payment of Rs.5.25 Crores, instead of Rs.7 Crores due and payable by him to the Bank, and had also sold the said shop for a consideration of Rs.8.5 Crores, now embarked upon a dishonest design of not complying with the above undertaking, but to breach the same. This was brought to the attention of this Court on 11 th September, 2017. This Court therefore, directed the Partners of the restaurant named ‘Veg Always’ including Defendant No.1 to remain present before this Court on 18th September, 2017 at 03.00 p.m. Defendant No.1 who was aware that his then Advocates Kochar and Company and the Counsel previously engaged by them will not agree to be a party to his dishonest design, decided to discharge them. Therefore, Kochar and Company appeared before the Court on 18 th September, 2017 and sought discharge from representing Defendant No. 1 in the above Suit, which was allowed and the matter was adjourned to 25 th September, 2017 at 03.00 p.m. (incorrectly typed in the Order as 25th October, 2017 at 03.00 p.m.) Mr. Mathew Nedumpara, Advocate, thereafter appeared for Defendant No.1 and moved the above Notice of Motion seeking reliefs set out hereinabove.

47. As stated hereinabove, Defendant No.1 in the above Notice of Motion has suppressed facts, has made allegations against the Plaintiffs and this Court, which are scandalous, false and incorrect to the knowledge of the ssp 48 nmcdl-706 of 2017 Defendant No.1 and has prayed that all the orders passed by this Court from 26 th April, 2017 are void ab-initio and ought to be set aside. When this Court pointed out the facts narrated hereinabove to Advocate Mathew Nedumpara and enquired why the same are suppressed in the Affidavit in Reply to the above Notice of Motion, Advocate Nedumpara stated that, “I have accepted the brief only after perusing the order dated 26 th April, 2017 and I have not considered what happened thereafter and have also not gone through the subsequent orders.” A reading of the Affidavit in support of the Notice of Motion along with the Reply filed thereto by the Plaintiffs, establishes beyond any doubt that since Advocate Mathew Nedumpara is unable to explain the contemptuous conduct of his client and justify the scandalous allegations made by Defendant No.1 against this Court, he has given an answer which is not only incorrect, but is highly irresponsible and not befitting any Advocate appearing before the highest Court of the State, and hence is strongly deprecated.

48. To sum up :

(i) The reasons for the Orders passed by me dated 26th April, 2017 are mentioned in Paragraphs 16 and 17 hereinabove. No objection was ever raised by Defendant No.1 and/or his Advocates qua the said Order and, infact, after the Order dated 26th April, 2017 was passed, the Defendant No.1 throughout appeared before this Court along with his Advocate and as stated hereinabove ssp 49 nmcdl-706 of 2017 himself came forward, admitted his mistake and sought assistance of the Court in resolving his financial problems. This Court acceded to his request and passed several orders, which led to his medical shop being released by the Bank upon payment of Rs.5.25 Crores only , instead of Rs.7 Crores due and payable by him to the Bank and sale of his medical shop for an amount of Rs.8.25 Crores.

(ii) That as explained in Paragraph 18 hereinabove, the question of hearing the matters and orders being passed without jurisdiction, does not arise. Infact, since the earlier Advocate of the Defendant No.1 was well aware that I am authorized by the Learned Chief Justice to hear matters throughout the vacations as per my Assignment with effect from 27 th March, 2017, they along with the others, including Defendant No.1, moved this Court on 12 th May 2017 (during vacations and despite the matter not appearing on my board) and obtained consent orders. Again, since all the parties and their respective Advocates including Defendant No.1 were aware that several steps were required to be taken in the matter, as agreed and undertaken in the Consent Order dated 12th May, 2017, they requested me to treat the matter as Part-Heard and accordingly, their consent was recorded in the Order dated 12 th May, 2017. A report was also submitted to the Hon’ble the Chief Justice setting out the number of disposals during the court vacations, the matters which were treated ssp 50 nmcdl-706 of 2017 as part-heard and the dates on which the same were placed before me including the matters between the Plaintiffs and the Defendants herein. The Advocates for the parties including the Advocate for Defendant No.1 appeared before me on 12 occasions after the Court reopened and obtained several orders including acceptance of the offer of Rs.8.50 Crores towards sale of the medical shops of Defendant No.1 and its partnership. At no point of time any of them have raised any objection as is now sought to be done.

(iii) On 3rd May, 2017 amongst others, Defendant No.1 and his Advocate were present before me. The matter was adjourned to 9 th May, 2017, when amongst others, Defendant No.1 along with his Advocate, were present before me. However, Defendant No.1 has in his Affidavit in support of the Notice of Motion, dishonestly alleged that on 3 rd May, 2017 he felt relaxed that since the High Court is closed for summer vacation, he could therefore brief his lawyer leisurely. However, he was served with a notice by the Plaintiffs lawyer stating he should be present in my Chambers on 12 th May, 2017. Defendant No. 1, therefore, had to engage a Counsel post haste and this Court, for reasons difficult to be fathomed, was pleased to record the undertakings on his behalf, as set out therein (in the Order dated 12 th May, 2017), and also recorded in the Order that, “by consent the matter is treated as part-heard” and that any right ssp 51 nmcdl-706 of 2017 thinking person would have entertained disturbing thoughts as to the integrity and honesty of this Court in passing orders/recording the proceedings of the Court. That Defendant No.1 has been put to grave injustice by the aforesaid orders of the Court which has recorded as consent, things which were forced to be consented out of sheer fear of the Court. The extent to which these dishonest and scandalous allegations are made against the Court, is clearly established from the fact that after the matter on 9 th May, 2017, there was a meeting held between the Advocate for the Plaintiffs and Advocate for Defendant No.1 in the presence of Defendant No.1 and Consent Minutes were prepared. The Advocates for the parties had agreed to move my Court on 12 th May, 2017 (when the matter was not shown on Board) and obtain an order in terms of the Consent Minutes prepared by them. Infact as pointed out by the Advocate for the Plaintiffs, a copy of the Consent Minutes was emailed to the Advocate for Defendant No.1 on 11 th May, 2017. Thereafter, as agreed between the parties and their Advocates, on 12th May, 2017, an Application was moved before me and an order was obtained in terms of the Consent Minutes when Defendant No.1 was present. Since various steps were required to be taken by the parties, as per Order dated 12 th May, 2017, at the request of the parties, it was recorded in the Order that, “by consent the matter is to be treated as part-heard.”

49. As set out hereinabove, Defendant No. 1 was conscious of the fact that all the allegations made by him are false and incorrect. He was well aware that his earlier Advocate will not be a party to his dishonest design of making allegations against the Court only because he was wanting to wriggle out of his undertakings recorded in the Order dated 12th May, 2017. He therefore, changed his Advocate and briefed Mr. Mathew Nedumpara to appear on his behalf in the above Notice of Motion, making false and scandalous allegations against this Court.

50. In view of the facts and circumstances narrated hereinabove, the case laws relied upon by Mr. Nedumpara does not assist him in any way. As held in the decisions of the Hon’ble Supreme Court and this Court, set out hereinabove, the undertakings given by Defendant No. 1 are binding on him and he is estopped from going back on the same.

51. In view thereof, the following Order is passed :

(i) The above Notice of Motion is dismissed.

(ii) The Defendant No. 1 is directed to pay exemplary costs of Rs.10

Lacs to the Plaintiffs within a period of two weeks from today.

(S.J. KATHAWALLA, J.)

Supreme Court Judgement On Service Tax Law

MASTI

In the latest Supreme Court judgement in UOI vs. Intercontinental Consultants and Technocrats Pvt. Ltd Civil Appeal No. 2013 of 2014 the assesseess were rendering services in the following four categories:

(a) Consulting engineering services.
(b) Share transfer agency services.
(c) Custom house agent services covered by the head ‘clearing and forwarding agent’.

(d) The site formation and clearances, excavation and earth moving and demolition services.

The Supreme Court in the latest judgement had to consider that while rendering the aforesaid services, the assessees are also getting reimbursement in respect of certain activities undertaken by them which according to them is not includable to arrive at ‘gross value’ charged from their clients.

It was noted by the Supreme Court in the judgement that as per Rule 5 of the Service Tax (Determination of Value) Rules, 2006 (hereinafter referred to as the ‘Rules’), the value of the said reimbursable activities is also to be included as part of services provided by the assessees.

The Supreme Court judgement points out that Writ petitions were filed by the assessees challenging the vires of Rule 5 of the Rules as unconstitutional as well as ultra vires the provisions of Sections 66 and 67 of Chapter V of the Finance Act, 1994 (hereinafter referred to as the ‘Act’).

The High Court of Delhi has, by the judgment dated November 30, 2012, accepted the said challenge and declared Rule 5 to be ultra vires these provisions.

The Supreme Court has considered the correctness of the judgment of the Delhi High Court and outocme thereof would determine the fate of all these appeals/transfer petitions.

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2013 OF 2014

UNION OF INDIA & ANR. …..APPELLANT(S)

VERSUS

M/S. INTERCONTINENTAL CONSULTANTS
AND TECHNOCRATS PVT. LTD. …..RESPONDENT(S)

WITH

CIVIL APPEAL NOS. 295-299 OF 2014

CIVIL APPEAL NO. 2021 OF 2014

CIVIL APPEAL NOS. 4340-4341 OF 2014

CIVIL APPEAL NO. 6866 OF 2014

CIVIL APPEAL NO. 7685 OF 2014

CIVIL APPEAL NO. 7688 OF 2014

CIVIL APPEAL NO. 8056 OF 2015

CIVIL APPEAL NO. 3360 OF 2015

TRANSFER PETITION (CIVIL) NOS. 1043-1045 OF 2017

Signature Not Verified CIVIL APPEAL NO. 6090 OF 2017
Digitally signed by
NIDHI AHUJA

CIVIL APPEAL NOS. 10626-10627 OF 2017
Date: 2018.03.08
16:44:49 IST
Reason:

TRANSFER PETITION (CIVIL) NOS. 1932-1934 OF 2017

Civil Appeal No. 2013 of 2014 with Ors. Page 1 of 44
CIVIL APPEAL NO. 6864 OF 2014

CIVIL APPEAL NO. 6865 OF 2014

CIVIL APPEAL NOS. 4536-4537 OF 2016

CIVIL APPEAL NO. 5130 OF 2016

CIVIL APPEAL NO. 4975 OF 2016

CIVIL APPEAL NO. 5453 OF 2016

CIVIL APPEAL NOS. 10223-10224 OF 2017

AND

CIVIL APPEAL NO. 5444 OF 2017

JUDGMENT
A.K. SIKRI, J.

In all these appeals, legal issue that needs determination is almost identical, though there may be little variation on facts.

This difference pertains to the nature of services provided by the respondents/assessees who are all covered by the service tax.

The fringe diferences in the nature of services, however, nature of differences, however, has no impact on the final outcome.

2) All the assessees are paying service tax. The services which these assessees are rendering broadly fall in the following four categories:

(a) Consulting engineering services.
(b) Share transfer agency services.

(c) Custom house agent services covered by the head ‘clearing

and forwarding agent’.

(d) The site formation and clearances, excavation and earth

moving and demolition services.

3) While rendering the aforesaid services, the assessees are also

getting reimbursement in respect of certain activities undertaken by them which according to them is not includable to arrive at ‘gross value’ charged from their clients. As per Rule 5 of the Service Tax (Determination of Value) Rules, 2006 (hereinafter referred to as the ‘Rules’), the value of the said reimbursable activities is also to be included as part of services provided by these respondents. Writ petitions were filed by the assessees challenging the vires of Rule 5 of the Rules as unconstitutional as well as ultra vires the provisions of Sections 66 and 67 of Chapter V of the Finance Act, 1994 (hereinafter referred to as the ‘Act’).
The High Court of Delhi has, by the judgment dated November 30, 2012, accepted the said challenge and declared Rule 5 to be ultra vires these provisions. Other cases have met similar results by riding on the judgment dated November 30, 2012. This necessitates examining the the correctness of the judgment of the Delhi High Court and outocme thereof would determine the fate of all these appeals/transfer petitions.

4) This judgment was rendered by the High court in the writ petition filed by M/s. Intercontinental Consultants and Technocrats Pvt.

Ltd. out of which Civil Appeal No. 2013 of 2014 arises. Therefore, for our purpose, it would suffice to advert to the facts of this appeal and take note of the reasons which have prevailed with the High Court in arriving at this conclusion.

5) The assessee M/s. Intercontinental Consultants and Technocrats Pvt. Ltd. is a provider of consulting engineering services. It specialises in highways, structures, airports, urban and rural infrastructural projects and is engaged in various road projects outside and inside India. In the course of the carrying on of its business, the petitioner rendered consultancy services in respect of highway projects to the National Highway Authority of India (NHAI). The petitioner receives payments not only for its service but is also reimbursed expenses incurred by it such as air travel, hotel stay, etc. It was paying service tax in respect of amounts received by it for services rendered to its clients. It was not paying any service tax in respect of the expenses incurred by it, which was reimbursed by the clients. On 19.10.2007, the Superintendent (Audit) Group II (Service Tax), New Delhi issued a letter to the petitioner on the subject “service tax audit for the financial year 2002-03 to 2006-07. In this letter, it was mentioned by the appellant that service tax was liable to be charged on the gross value including reimbursable and out of pocket expenses like travelling, lodging and boarding etc. and the respondent was directed to deposit the due service tax along with interest @13% under Sections 73 and 75 respectively of the Act. In response, the respondent provided month-wise detail of the professional income as well as reimbursable out of pocket expenses for the period mentioned in the aforesaid letter. Thereafter, a show cause notice dated March 17, 2008 was issued by the Commissioner, Service Tax, Commissionerate vide which the respondent was asked to show cause as to why the service tax should not be recovered by including the amounts of reimbursable which were received by the respondent, pointing out these were to be included while arriving at the gross value as per provisions of Rule 5(1) of the Rules.

6) Rule 5 was brought into existence w.e.f. June 01, 2007. The demand which was made in the show cause notice was covered by the period from October, 2002 to March, 2007. Against this show cause notice, the respondent preferred Writ Petition No. 6370 of 2008 in the High Court of Delhi challenging the vires thereof with three prayers, namely:

(i) for quashing Rule 5 in its entirety of the Service Tax (Determination of Value) Rules, 2006 to the extent it includes the reimbursement of expenses in the value of taxable service for the purpose of charging service tax; and

(ii) for declaring the rule to be unconstitutional and ultra vires Sections 66 and 67 of the Finance Act, 1994; and

(iii) for quashing the impugned show-cause notice-cum-demand dated 17.03.2008 holding that it is illegal, arbitrary, without jurisdiction and unconstitutional.

7) Rule 5, which provides for ‘inclusion in or exclusion from the value of certain expenditure or costs’, is reproduced below in order to understand its full implication:

“5. Inclusion in or exclusion from value of certain expenditure or costs.
(1) Where any expenditure or costs are incurred by the service provider in the course of providing taxable service, all such expenditure or costs shall be treated as consideration for the taxable service provided or to be provided and shall be included in the value for the purpose of charging service tax on the said service.

(2) Subject to the provisions of sub rule (1), the expenditure or costs incurred by the service provider as a pure agent of the recipient of service, shall be excluded from the value of the taxable service if all the following conditions are satisfied, namely:

 the service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods or services procured;

 the recipient of service receives and uses the goods or services so procured by the service provider in his capacity as pure agent of the recipient of service;

 the recipient of service is liable to make payment to the third party;

 the recipient of service authorities the service provider to make payment on his behalf;

 the recipient of service knows that the goods and services for which payment has been made by the service provider shall be provided by the third party;

 the payment made by the service provider on behalf of the recipient of service has been separately indicated in the invoice issued by the service provider to the recipient of service;

 the service provider recovers from the recipient of service only such amount as has been paid by him to the third party; and  the goods or services procured by the service provider from the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account.

Explanation 1 : For the purposes of sub rule (2), “pure agent” means a person who –  enters into a contractual agreement with the recipient of service to act as his pure agent to incur expenditure or costs in the course of providing taxable service;

 neither intends to hold nor holds any title to the goods or services so procured or provided as pure agent of the recipient of service;

 does not use such goods or services so procured; and  receives only the actual amount incurred to procure such goods or services.

Explanation 2 : For the removal of doubts it is clarified that the value of the taxable service is the total amount of consideration consisting of all components of the taxable service and it is immaterial that the details of individual components of the total consideration is indicated separately in the invoice.

Illustration 1 : X contracts with Y, a real estate agent to sell his house and thereupon Y gives an advertisement in television. Y billed X including charges for Television advertisement and paid service tax on the total consideration billed. In such a case, consideration for the service provided is what X pays to Y. Y does not act as an agent behalf of X when obtaining the television advertisement even if the cost of television advertisement is mentioned separately in the invoice issued by X.

Advertising service is an input service for the estate agent in order to enable or facilitate him to perform his services as an estate agent.

Illustration 2 : In the course of providing a taxable service, a service provider incurs costs such as traveling expenses, postage, telephone, etc., and may indicate these items separately on the invoice issued to the recipient of service. In such a case, the service provider is not acting as an agent of the recipient of service but procures such inputs or input service on his own account for providing the taxable service. Such expenses do not become reimbursable expenditure merely because they are indicated separately in the invoice issued by the service provider to the recipient of service.

Illustration 3 : A contracts with B, an architect for building a house. During the course of providing the taxable service, B incurs expenses such as telephone charges, air travel tickets, hotel accommodation, etc., to enable him to effectively perform the provision of services to A. In such a case, in whatever form B recovers such expenditure from A, whether as a separately itemised expense or as part of an inclusive overall fee, service tax is payable on the total amount charged by B. Value of the taxable service for charging service tax is what A pays to B.

Illustration 4 : Company X provides a taxable service of rent cab by providing chauffeur driven cars for overseas visitors. The chauffeur is given a lump sum amount to cover his food and overnight accommodation and any other incidental expenses such as parking fees by the Company X during the tour. At the end of the tour, the chauffeur returns the balance of the amount with a statement of his expenses and the relevant bills. Company X charges these amounts from the recipients of service. The cost incurred by the chauffeur and billed to the recipient of service constitutes part of gross amount charged for the provision of services by the company X.”

8) The case set up by the respondent in the writ petition was that Rule 5(1) of the Rules, which provides that all expenditure or cost incurred by the service provider in the course of providing the taxable services shall be treated as consideration for the taxable services and shall be included in the value for the purpose of charging service tax, goes beyond the mandate of Section 67. It was argued that Section 67 which deals with valuation of taxable services for charging service tax does not provide for inclusion of the aforesaid expenditure or cost incurred while providing the services as they cannot be treated as element/components of service. Section 67 was amended by Finance Act, 2006 w.e.f.

May 01, 2006. Since the cases before us involve period prior to the aforesaid amendment as well as post amendment period, it would apt to take note of both unamended and amended provisions. Unamended Section 67 was in the following form:

““67. Valuation of taxable services for charging service tax.
For the purposes of this Chapter, the value of any taxable service shall be the gross amount charged by the service provider for such provided or to be provided by him.
Explanation 1. For the removal of doubts, it is hereby declared that the value of a taxable service, as the case may be, includes,
(a) the aggregate of commission or brokerage charges by a broker on the sale or purchase of securities including the commission or brokerage paid by the stock broker to any sub broker.
(b) the adjustments made by the telegraph authority from any deposits made by the subscriber at the time of application for telephone connection or pager or facsimile or telegraph or telex or for leased circuit;
(c)the amount of premium charged by the insurer from the policy holder;
(d) the commission received by the air travel agent from the airline;

(e) the commission, fee or any other sum received by an actuary, or intermediary or insurance intermediary or insurance agent from the insurer;

(f) the reimbursement received by the authorized service station from manufacturer for carrying out any service of nay motor car, light motor vehicle or two wheeled motor vehicle manufactured by such manufacturer; and

(g) the commission or any amount received by the rail travel agent from the Railways or the customer.

But does not include –

(i) initial deposit made by the subscriber at the time of application for telephone connection or pager or facsimile (FAX) or telephone or telex or for leased circuit;

(ii) the cost of unexposed photography film, unrecorded magnetic tape or such other storage devices, if any, sold to the client during the course of providing the service;

(iii) the cost of parts or accessories, or consumable such as lubricants and coolants, if any, sold to the customer during the course of service or repair of motor cars, light motor vehicle or two wheeled motor vehicles;

(iv) the airfare collected by air travel agent in respect of service provided by him;

(v) the rail fare collected by rail travel agent in respect of service provided by him;

(vi) the cost of parts or other material, if any, sold to the customer during the course of providing maintenance or repair service;

(vii) the cost of parts or other material, if any, sold to the customer during the course of providing erection, commissioning or installation service; and
(viii) interest on loan.

Explanation 2 – Where the gross amount charged by a service provider is inclusive of service tax payable, the value of taxable service shall be such amount as with the addition of tax payable, is equal to the gross amount charged.

Explanation 3. For the removal of doubts, it is hereby declared that the gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service.”

9) After its amendment w.e.f. May 01, 2006, a much shorter version was introduced which reads as under:

“67. Valuation of taxable services for charging service tax.
(1) Subject to the provisions of this Chapter, where service tax is chargeable on any taxable service with reference to its value, then such value shall,
(i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him;
(ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money as, with the addition of service tax charged, is equivalent to the consideration;
(iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as ay be determined in the prescribed manner.
(2) Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged.

(3) The gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service.

(4) Subject to the provisions of sub sections (1), (2) and (3), the value shall be determined in such manner as may be prescribed.

Explanation: For the purpose of this section,

(a) “consideration” includes any amount that is payable for the taxable services provided or to be provided;

(b) “money” includes any currency, cheque, promissory note, letter of credit, draft, pay order, travelers cheque, money order, postal remittance and other similar instruments but does not include currency that is held for its numismatic value;

(c) “gross amount charged” includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and book adjustment, and any amount credited or debited, as the case may be, to any account, whether called “Suspense account” or by any other name, in the books of accounts of a person liable to pay service tax, where the transaction of taxable service is with any associated enterprise.”

10) The High Court, after taking note of the aforesaid provisions, noted that the provisions both amended and unamended Section 67 authorised the determination of value of taxable services for the purpose of charging service tax under Section 66 (which is a charging section) as the gross amount charged by the service provider for such services provided or to be provided by him, in a case where the consideration for the service is money.

Emphasising on the words ‘for such service’, the High Court took the view that the charge of service tax under Section 66 has to be on the value of taxable service i.e. the value of service rendered by the assessee to the NHAI, which is that of a consulting engineer, that can be brought to charge and nothing more. The quantification of the value of the service can, therefore, never exceed the gross amount charged by the service provider for the service provided by him. On that analogy, the High Court has opined that scope of Rule 5 goes beyond the Section which was impermissible as the Rules which have been made under Section 94 of the Act can only be made ‘for carrying out the provisions of this Chapter’ (Chapter V of the Act) which provides for levy quantification and collection of the service tax. In the process, the High Court observed that the expenditure or cost incurred by the service provider in the course of providing the taxable service can never be considered as the gross amount charged by the service provider ‘for such service’ provided by him, and illustration 3 given below the Rule which included the value of such services was a clear example of breaching the boundaries of Section 67.

The High Court even went on to hold further pointed out that it may even result in double taxation inasmuch as expenses on air travel tickets are already subject to service tax and are included in the bill. No doubt, double taxation was permissible in law but it could only be done if it was categorically provided for and intended; and could not be enforced by implication as held in Jain Brothers v. Union of India1. The High Court has also referred to many judgments of this Court for the proposition that Rules cannot be over-ride or over-reach the provisions of the main enactment2. The High Court also referred to the judgment of Queens Bench of England in the case of Commissioner of Customs and Excise v. Cure and Deeley Ltd.3.

11) Mr. K. Radhakrishnan, learned senior counsel argued for the appellant, ably assisted by Ms. Nisha Bagchi, advocate who also made significant contribution by arguing some of the nuances of the issue involved. Submission of the learned counsel appearing for the appellant/Department was that prior to April 19, 2006 i.e. in the absence of Rule 5 of the Rules, the value of taxable services was covered by Section 67 of the Act. As per this Section, the value of taxable services in relation to consulting engineering services provided or to be provided by a consulting engineer to 1 (1970) 77 ITR 107 2 Central Bank of India & Ors. v. Workmen, etc., (1960) 1 SCR 200; Babaji Kondaji Garad v. Nasik Merchants Co-operative Bank Ltd., (1984) 2 SCC 50; State of U.P. & Ors. v. Babu Ram Upadhya, (1961) 2 SCR 679; CIT v. S. Chenniappa Mudaliar, (1969) 74 ITR 41; Bimal Chandra Banerjee v. State of M.P. & Ors., (1971) 81 ITR 105 and CIT, Andhra Pradesh v. Taj Mahal Hotel, (1971) 82 ITR 44 3 (1961) 3 WLR 788 (QB) the client shall be the gross amount charged for a consideration or in money from the client in respect of engineering services.

The expression ‘gross amount charged’ would clearly include all the amounts which were charged by the service provider and would not be limited to the remuneration received from the customer. The very connotation ‘gross amount charged’ denotes the total amount which is received in rendering those services and would include the other amounts like transportation, office rent, office appliances, furniture and equipments etc. It was submitted that this expenditure or cost would be part of consideration for taxable services. It was, thus, argued that essential input cost had to be included in arriving at gross amount charged by a service provider.

12) It was further submitted that Section 67 of the Act was amended w.e.f. May 01, 2006 and this also retained the concept of ‘the gross amount charged’ for the purpose of arriving at valuation on which the service tax is to be paid. The learned counsel pointed out that sub-section (4) of amended Section 67 categorically provides that the value has to be determined in such a manner as may be prescribed and in pursuant thereto, Rule 5 of the Rules which came into effect from June 01, 2007, provided for ‘inclusion in or exclusion from value of certain expenditure or costs’. It was submitted that there was no dispute that as per this Rule, all such expenditure or costs which are incurred by the service provider in the course of providing taxable services are to be treated as consideration for the taxable services provided or to be provided for arriving at valuation for the purpose of charging service tax, except those costs which were specifically excluded under sub-

rule (2) of Rule 5. Submission was that since Section 67 specifically lays down the principle of gross amount charged by a service provider for the services provided or to be provided, Rule 5 did not go contrary to Section 67 as it only mentions what would be the meaning of gross amount charged.

13) In the aid of this submission, the learned counsel sought to take help from principle laid down in excise law and submitted that it is held by this Court in Union of India & Ors. v. Bengal Shrachi Housing Development Limited & Anr. 4 that same principles as applicable in excise law are applicable while examining service tax matters. Reliance was placed on paragraph 22 of the said judgment to support this proposition. However, we may point out at this stage itself that the context in which the observations were made were entirely different. The issue was as to whether 4 (2018) 1 SCC 311 service tax, which is an indirect tax, can be passed on by the service provider to the recepient of the service and, in this hue, the matter was discussed, as can be seen from the combined reading of paragraphs 21 and 22 which are to the following effect:

“21. It is thus clear that the judgments of this Court which referred to service tax being an indirect tax have reference only to service tax being an indirect tax in economic theory and not constitutional law. The fact that service tax may not, in given circumstances, be passed on by the service provider to the recipient of the service would not, therefore, make such tax any the less a service tax. It is important to bear this in mind, as the main prop of Shri Jaideep Gupta’s argument is that service tax being an indirect tax which must be passed on by virtue of the judgments of this Court, would make the recipient of the service the person on whom the tax is primarily leviable.
22. Let us now examine some of the judgments relating to another indirect tax, namely, excise duty. Like service tax, excise duty is also in the economic sense, an indirect tax. The levy is on manufacture of goods; and the taxable person is usually the manufacturer of those goods.
InCentral Provinces and Berar Sales of Motor Spirit and Lubricants Taxation Act, 1938, In re, the Federal Court decided, through Maurice Gwyer, C.J., that excise duty under the Government of India Act, 1935 is a power to impose duty of excise upon the manufacturer of excisable articles at the stage of or in connection with manufacture or production. In a separate judgment, Jayakar, J. held that all duties of excise are levied on manufacture of excisable goods and can be levied and collected at any subsequent stage up to consumption.”

14) It was also submitted that while dealing with the valuation of a taxable service, the provision which deals with valuation has to be taken into consideration and no assistance can be taken from charging section, as held in Union of India & Ors. v. Bombay Tyre International Limited & Ors.5:

“8. Mr N.A. Palkhivala, learned counsel for the assessees, has propounded three principles which, he contends, form the essential characteristics of a duty of excise. Firstly, he says, excise is a tax on manufacture or production and not on anything else. Secondly, uniformity of incidence is a basic characteristic of excise. And thirdly, the exclusion of post-manufacturing expenses and post-manufacturing profits is necessarily involved in the first principle and helps to achieve the second. Learned counsel urges that where excise duty is levied on an ad valorem basis the value on which such duty is levied is a “conceptual value”, and that the conceptual nature is borne out by the circumstance that the identity of the manufacturer and the identity of the goods as well as the actual wholesale price charged by the manufacturer are not the determining factors. It is urged that the old Section 4(a) clearly indicates that a conceptual value forms the basis of the levy, and that the actual wholesale price charged by the particular assessee cannot be the basis of the excise levy. It is said that the criterion adopted in clause (a) succeeds in producing uniform taxation, whether the assessees are manufacturers who sell their goods in wholesale, semi-wholesale or in retail, whether they have a vast selling and marketing network or have none, whether they sell at depots and branches or sell at the factory gate, and whether they load the ex-factory price with post-manufacturing expenses and profits or do not do so. Because the value of the article rests on a conceptual base, it is urged, the result of the assessment under Section 4(a) cannot be different from the result of an assessment under Section 4(b).
The contention is that the principle of uniformity of taxation requires the exclusion of post-manufacturing expenses and profits, a factor which would vary from one manufacturer to another. It is pointed out that such exclusion is necessary to create a direct and immediate nexus between the levy and the manufacturing activity, and to bring about a uniformity in the incidence of the levy. Learned counsel contends that the position is the same under the new Section 4 which, he says, must need be so because of the 5 (1984) 1 SCC 467 fundamental nature of the principles propounded earlier. Referring to the actual language of the new Section 4(1)(a), it is pointed out that the expression “normal price” therein means “normal for the purposes of excise”, that is to say, that the price must exclude post-manufacturing expenses and post-manufacturing profit and must not be loaded with any extraneous element. It is conceded, however, that under the new Section 4(1)(a) there is no attempt to preserve uniformity as regards the amount of duty between one manufacturer and another, but it is urged that the basis on which the value is determined is constituted by the same conceptual criterion, that post- manufacturing expenses and post-manufacturing profit must be excluded. Considerable emphasis has been laid on the submission that as excise duty is a tax on the manufacture or production of goods it must be a tax intimately linked with the manufacture or production of the excisable article and, therefore, it can be imposed only on the assessable value determined with reference to the excisable article at the stage of completed manufacture and to no point beyond. To preserve this intimate link or nexus between the nature of the tax and the assessment of the tax, it is urged that all extraneous elements included in the “value” in the nature of post- manufacturing expenses and post-manufacturing profits have to be off-loaded. It is pointed out that factors such as volume, quantity and weight, which enter into the measure of the tax, are intimately linked with the manufacturing activity, and that the power of Parliament under Entry 84 of List I of the Seventh Schedule to the Constitution to legislate in respect of “value” is restricted by the conceptual need to link the basis for determining the measure of the tax with the very nature of the tax.

xxx xxx xxx

10. Besides this fundamental issue, there are other points of dispute, principally in respect of the connotation of the expression “related person” in the new Section 4 as well as the nature of the deductions which can be claimed by the assessee as post- manufacturing expenses and post-manufacturing profit from the price for the purpose of determining the “value”.

11. The submissions made by learned counsel for the parties in support of their respective contentions cover a wide area, and several questions of a fundamental nature have been raised. We consider it necessary to deal with them because they enter into and determine the conclusions reached by us.

12. We think it appropriate that at the very beginning we should briefly indicate the concept of a duty of excise. Both Entry 45 of List I of the Seventh Schedule to the Government of India Act, 1935, under which the original Central Excises and Salt Act was enacted, and Entry 84 of List I of the Seventh Schedule to the Constitution under which the Amendment Act of 1973 was enacted, refer to “Duties of excise on… goods manufactured or produced in India”. A duty of excise, according to the Federal Court in The Central Provinces and Berar Sales of Motor Spirit and Lubricants Taxation Act, 1938 [AIR 1939 FC 1, 6 : 1939 FCR 18] is a duty ordinarily levied on the manufacturer or producer in respect of the manufacture or production of the commodity taxed. A distinction was drawn between the nature of the tax and the point at which it was collected, and Gwyer, C.J. observed that theoretically “. . .there can be no reason in theory why an excise duty should not be imposed even on the retail sale of an article, if the taxing Act so provides. Subject always to the legislative competence of the taxing authority, a duty on home-produced goods will obviously be imposed at the stage which the authority finds to be the most convenient and the most lucrative, wherever it may be; but that is a matter of the machinery of collection, and does not affect the essential nature of the tax. The ultimate incidence of an excise duty, a typical indirect tax, must always be on the consumer, who pays as he consumes or expends; and it continues to be an excise duty, that is, a duty on home-produced or home-manufactured goods, no matter at what stage it is collected….” (emphasis supplied). The position was explained further in Province of Madras v. Boddu Paidanna and Sons [1942 FCR 90, 101 : AIR 1942 FC 33] where the Federal Court observed:

“… There is in theory nothing to prevent the Central Legislature from imposing a duty of excise on a commodity as soon as it comes into existence, no matter what happens to it afterwards, whether it be sold, consumed, destroyed, or given away. A taxing authority will not ordinarily impose such a duty, because it is much more convenient administratively to collect the duty (as in the case of most of the Indian Excise Acts) when the commodity leaves the factory for the first time, and also because the duty is intended to be an indirect duty which the manufacturer or producer is to pass on to the ultimate consumer, which he could not do if the commodity had, for example, been destroyed in the factory itself. It is the fact of manufacture which attracts the duty, even though it may be collected later;….” The observations show that while the nature of an excise is indicated by the fact that it is imposed in respect of the manufacture or production of an article, the point at which it is collected is not determined by the point of time when its manufacture is completed but will rest on considerations of administrative convenience, and that generally it is collected when the article leaves the factory for the first time. In other words, the circumstance that the article becomes the object of assessment when it is sold by the manufacturer does not detract from its true nature, that it is a levy on the fact of manufacture. In a subsequent case, Governor-General-in- Council v. Province of Madras [1945 FCR 179 : AIR 1945 FC 98] , the Privy Council referred to both Central Provinces and Berar Sales of Motor Spirit and Lubricants Taxation Act, 1938 [AIR 1939 FC 1, 6 : 1939 FCR 18] and Province of Madras v. Boddu Paidanna and Sons [1942 FCR 90, 101 : AIR 1942 FC 33] and affirmed that when excise was levied on a manufacturer at the point of the first sale by him “that may be because the taxation authority imposing a duty of excise finds it convenient to impose that duty at the moment when the excisable article leaves the factory or workshop for the first time on the occasion of its sale. But that method of collecting the tax is an accident of administration; it is not of the essence of the duty of excise, which is attracted by the manufacture itself. This Court had occasion to consider a similar question in R.C. Jall v. Union of India [AIR 1962 SC 1281 : 1962 Supp (3) SCR 436, 451] . In that case, the Central Government was authorised by an Ordinance to levy and collect as a cess on coal and coke despatched from collieries in British India a duty of excise at a specified rate. Rule 3 made under the Ordinance empowered the Government to impose a duty of excise on coal and coke when such coal and coke was despatched by rail from the collieries of the coke plants, and the duty was to be collected by the Railway Administration by means of a surcharge on freight either from the consignor or consignee. It was contended by the assessee that the excise duty could not legally be levied on the consignee who had nothing to do with the manufacture or production of coal. The Court remarked:

“The argument confuses the incidence of taxation with the machinery provided for the collection thereof,” and reference was made to In re the Central Provinces and Berar Act 14 of 1938[AIR 1939 FC 1, 6 : 1939 FCR 18] , Province of Madras v. Boddu Paidanna and Sons [1942 FCR 90, 101 : AIR 1942 FC 33] and Governor-General in Council v. Province of Madras [1945 FCR 179 : AIR 1945 FC 98] . This Court then summarised the law as follows:

“… Excise duty is primarily a duty on the production or manufacture of goods produced or manufactured within the country. It is an indirect duty which the manufacturer or producer passes on to the ultimate consumer, that is, its ultimate incidence will always be on the consumer. Therefore, subject always to the legislative competence of the taxing authority, the said tax can be levied at a convenient stage so long as the character of the impost, that is, it is a duty on the manufacture or production, is not lost. The method of collection does not affect the essence of the duty, but only relates to the machinery of collection for administrative convenience.” Other cases followed where the nature of excise duty was reaffirmed in the terms set out earlier, and reference may be made to In re Bill to Amend Section 20 of the Sea Customs Act, 1878 and Section 3 of the Central Excises And Salt Act, 1944 [AIR 1963 SC 1760 : (1964) 3 SCR 787] ; Union of India v. Delhi Cloth & General Mills [AIR 1963 SC 791 : 1963 Supp (1) SCR 586] ; Guruswamy & Co. v. State of Mysore [AIR 1967 SC 1512 : (1967) 1 SCR 548] and South Bihar Sugar Mills Ltd. v. Union of India [AIR 1968 SC 922 : (1968) 3 SCR 21] .

xxx xxx xxx

17. A contention was raised for some of the assessees, that the measure was to be found by reading Section 3 with Section 4, thus drawing the ingredients of Section 3 into the exercise. We are unable to agree. We are concerned with Section 3(1), and we find nothing there which clothes the provision with a dual character, a charging provision as well as a provision defining the measure of the charge.

xxx xxx xxx

35. We have examined the principles of an excise levy and have considered the statutory construction of the Act, before and after its amendment, in view of the three propositions formulated, on behalf of the assessees, as principles constituting the essential characteristics of a duty of excise. It is apparent that the first proposition, that excise is a tax on the manufacture or production of goods, and not on anything else, is indisputable and is supported by a catena of cases beginning with The Central Provinces and Berar Sales of Motor Spirit and Lubricants Taxation Act, 1938 [AIR 1939 FC 1, 6 : 1939 FCR 18] . As regards the second proposition. that uniformity of incidence is a basic characteristic of excise, we are inclined to think that the accuracy of the proposition depends on the level at which the statute rests it. We shall discuss that presently. As to the third proposition, that the exclusion of post-manufacturing expenses and post-manufacturing profit is necessarily involved in the first principle does not inevitably follow. The exclusion of post-manufacturing expenses and post- manufacturing profits is a matter pertaining to the ascertainment of the “value” of the excisable article, and not to the nature of the excise duty, and as we have explained, the standard adopted by the Legislature for determining the “value” may possess a broader base than that on which the charging provision proceeds. The acceptance of the further statement contained in the formulation of the third proposition, that the exclusion of post-manufacturing expenses and post-manufacturing profits helps to achieve uniformity of incidence in the levy of excise duty, depends on what is the point at which such uniformity of incidence is contemplated. It is not necessarily involved at the stage of sale of the article by the manufacturer because we find, for example, that under the amended Section 3(3) of the Central Excises and Salt Act, different tariff values may be fixed not only (a) for different classes or descriptions of the same excisable goods, but also (b) for excisable goods of the same class or description (i) produced or manufactured by different classes of producers or manufacturers, or (ii) sold to different classes of buyers. That the “value” of excisable goods determined under the new Section 4(1)(a) may also vary according to certain circumstances is evident from the three clauses of the proviso to that clause. Clause (i) recognises that in the normal practice of wholesale trade the same class of goods may be sold by the assessee at different prices to different classes of buyers; in that event, each such price shall, subject to the other conditions of clause (a), be deemed to be the normal price of such goods in relation to each class of buyers. Clause (ii) provides that where the goods are sold in wholesale at a price fixed under any law or at a price being the maximum, fixed under any such law, then the price or the maximum price, as the case may be, so fixed, shall in relation to the goods be deemed to be the normal price thereof. Under clause

(iii), where the goods are sold in the course of wholesale trade by the assessee to or through a related person, the normal price shall be the price at which the goods are sold by the related person in the course of wholesale trade at the time of removal to dealers (not being related persons) or where such goods are not sold to such dealers, to dealers (being related persons) who sell such goods in retail. The verity of the three principles propounded by learned counsel for the assessees has been, as indeed it had to be, examined in the context of the Act before and after its amendment. For the case of the assessees is that the amendment has made no material change in the basic scheme of the levy and the provisions for determining the value of the excisable article.”

15) It was, thus, argued that the High Court had committed serious error in relying upon Section 66 of the Act (which is a charging section) while interpreting Section 67 of the Act, or for that matter, while examining the validity of Rule 5 of the Rules. The learned counsel also relied upon the dictionary meaning that is given to the word ‘gross amount’. At the end, it was submitted that Section 67 which uses the term ‘any amount’ would include quantum as well as the nature of the amount and, therefore, cost for providing services was rightly included in Rule 5, which was not ultra vires Section 67 of the Act.

16) Mr. J.K. Mittal, Advocate, appeared for M/s. Intercontinental Consultants and Technocrats Pvt. Ltd. He argued with emphasis that the impugned judgment of the High Court was perfectly in tune with legal position and did not call for any interference. At the outset, he pointed out that the Parliament has again amended Section 67 of the Act by the Finance Act, 2015 w.e.f. May 14, 2015. By this amendment, explanation has been added which now lays down that consideration includes the reimbursement of expenditure or cost incurred by the service provider. Taking clue therefrom, he developed the argument that for the first time, w.e.f.

May 14, 2015, reimbursement of expenditure or cost incurred by the service provider gets included under the expression ‘consideration’, which legal regime did not prevail prior to May 14, 2015. Therefore, for the period in question, the ‘consideration’ was having limited sphere, viz. It was only in respect of taxable services provided or to be provided. On that basis, submission was that for the period in question that is covered by these appeals, there could not be any service tax on reimbursed expenses as Section 67 of the Act did not provide for such an inclusion. Mr. Mittal also referred to para 2.4 of Circular/Instructions F. No. B-43/5/97-TRU dated June 6, 1997 wherein it is clarified that ‘…various other reimbursable expenses incurred are not to be included for computing the service tax”.

17) Coming to the main arguments revolving around Sections 66 and 67, he submitted that the High Court was right in holding that as per Section 66 which was a charging section, service tax is to be charged only on the ‘value of taxable services’. Likewise, Section 67 which deals with valuation of taxable service categorically mentions that it was only on the gross amount charged for providing ‘such’ a taxable service. Therefore, any amount collected which is not for providing such taxable service could not be brought within the tax net. Further, w.e.f. April 18, 2006, as per Explanation (c) to Section 67, “gross amount charged” includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and book adjustment, and any amount credited or debited, as the case may be, to any account, whether called “Suspense account” or by any other name, in the books of accounts of a person liable to pay service tax, where the transaction of taxable service is with any associated enterprise.” Whereas prior to April 18, 2006, as per Explanation 3 to Section 67, – “For the removal of doubts, it is hereby declared that the gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service.” Thus, levy on taxable services were not levied at once, but tax was levied at different point of time, tax was levied on difference person and also values in many taxable services was substantially exempted. He demonstrated it from the following table:

Sl. Taxable Services Sub- Date of Tax
No. clause levy Rate
of 65

1 Consulting Engineer (g) 7-7-1997
Service

2 Rent-a-Cab services by a (o) 16-7-1997 *
person engage in business
of renting of cabs
3 Transport of Passenger by (zzzo) **
Air by an aircraft operator
(a) International 1-5-2006
(b) Domestic 1-7-2010
4 Renting of immovable (zzzz) 1-7-2007
property
5 Restaurant services (zzzzy) 1-5-2011 ***
6 Accommodation services (zzzzw) 1-5-2011 ****
by Hotel
7 Telephone Services/ (b), 1-7-1994,
Telecommunication (zzzx) 1-6-2007
services by Telegraph
Authority

Notes :

* Service Tax was leviable only on 40% of value, 60% value was exempted.

** Service Tax was leviable only on 40% of value, 60% value was exempted, but prior to 01-04-2012, tax was only on 10% of value of tickets.

*** Service Tax was leviable only on 30% of value, 70% value was exempted.

**** Service Tax was leviable only on 50% of value, 50% value was exempted.

18) Following judgments were referred to and relied upon by Mr. Mittal for placating the aforesaid submissions:

(a) In the first instance, reference was made to the Constitution Bench judgment in the case of Mathuram Agrawal v. State of Madhya Pradesh6 wherein this Court held:

“12. … The statute should clearly and unambiguously 6 (1999) 8 SCC 667 convey the three components of the tax law i.e. the subject of the tax, the person who is liable to pay the tax and the rate at which the tax is to be paid. If there is any ambiguity regarding any of these ingredients in a taxation statute then there is no tax in law. Then it is for the legislature to do the needful in the matter.”

(b) The learned counsel also relied upon the following observations in case of Govind Saran Ganga Saran v.

Commissioner of Sales Tax & Ors.7:

“6. The components which enter into the concept of a tax are well known. The first is the character of the imposition known by its nature which prescribes the taxable event attracting the levy, the second is a clear indication of the person on whom the levy is imposed and who is obliged to pay the tax, the third is the rate at which the tax is imposed, and the fourth is the measure or value to which the rate will be applied for computing the tax liability. If those components are not clearly and definitely ascertainable, it is difficult to say that the levy exists in point of law. Any uncertainty or vagueness in the legislative scheme defining any of those components of the levy will be fatal to its validity.”
19) The learned counsel reiterated that such an ambiguity in law is now cured by amendment to Section 67 only w.e.f. May 14, 2015.
20) We have duly considered the aforesaid submissions made by the learned counsel for the Department as well as the counsel for the assessees. As can be seen, these submissions are noted in respect of Civil Appeal No. 2013 of 2014 where the assessee is providing ‘consulting engineering services’. In other appeals, 7 (1985) Suppl. SCC 205 though the nature of services is somewhat different, it doesn’t alter the colour of legal issue, in any manner. In the course of providing those services, the assessees had incurred certain expenses which were reimbursed by the service recepient.

These expenses were not included for the purpose of valuation, while paying the service tax. Thus, the question for determination which is posed in Civil Appeal No. 2013 of 2014, answer to that would govern the outcome of the other appeals as well. Still, for the sake of completeness, we may give a brief resume of all these cases.

“A. “Consulting Engineering Services” – Assessee were providing consulting services to M/s. NHAI for highway projects. They were paying Service Tax on remuneration only instead of the gross value charged from the client.

Sl. No. Civil Appeal Facts Reimbursable claimed
details as not includible
1. 2013/2014 Period: Oct’2002 – Transportation, office
UOI v. March’ 2007 (prior to rent, office supplies
Intercontinental coming into effect of and utilities, testing
Consultants impugned Rule 5 on charges, document
01.06.2007] printing charges,
travelling, lodging,
Demand:Rs.3,55,80,38/- boarding etc. (post
19.04.2006)
Assessee filed W.P. No.
6370/2008 directly Transportation, office
against Show Cause rent, office supplies,
Notice dated 17.03.2008 office furniture and
resulting in the equipment, reports
impugned judgment and documents

dated 30.11.2012 printing charges etc.
[Pre 19.04.2006].
[page 62-64]

2 6090/2017 Period: 2007-2008 [postTransportation, office
CST v. coming into effect of rent, office supplies &
Intercontinental impugned Rule 5 on utilities, testing
Consultants 01.06.2007] charges, document
printing charges,
Demand: Rs. travelling, lodging,
1,50,62,017/- boarding etc. [page
157]
Show Cause Notice
dated 24.10.2008 was
issued on the basis of
the earlier SCN dated
17.03.2008 for the
subsequent period.

O-I-O dated 02.03.2010
covered both SCNs
dated 17.03.2008 &
24.10.2008.

B. Share Transfer Agency Service:

Sl. Civil Appeal Facts Reimbursable
No. details claimed as not
includible
1 6866/2014 Period: 01.04.2008- Reimbursement of
31.03.2010 Expenses, out of
CST v. Through pocket expenses,
its Secretary Demand:Rs.13,83,479 Postage expenses,
stationery charges

2. 3360/2015 Period: 01.05.2006- Reimbursement of
31.03.2008 Expenses, out of
CST v. Pinnacle pocket expenses,
Share Registry Demand: Rs. 13,83,479 Postage expenses Pvt. Ltd.

C. Custom House Agent covered by head “Clearing and Forwarding Agent” prior to 18.04.2006. Procedure of raising two sets of invoices for reimbursement of various expenses and for service/agency charged separately started after introduction of Service Tax on CHA’s (wef 15.06.1997) in view of Circular dated 06.09.1997.

Invoice issued for services/agency charges alone is used for payment of Service Tax.

Sl. Civil Appeal Facts Reimbursable claimed
No. details as not includible
1. 295-299/2014 Period: 01.10.2003- Customs Examination
CST v. Asshita 31.03.2008 ([pre and Chages, Misc.
International post coming into effect Expenses, Sundry
of the impugned Rule 5] expenses, strapping
and re-strapping
Demand: 4,66,607/- charges,
documentation
SCN dated 21.04.2009. charges.
O-I-A dated 30.11.2010
[pages 238-259] set
aside demand prior to
18.04.2006 in view of
circular dated
06.06.1997.

2. 2021/2014 Period: Apr.08 to Aug’08 Customs Examination
CST v. Sunder [post coming into effect Charges, Misc.
Balan of impugned rule 5 on Expenses, Sundry
01.06.2007] expenses, strapping
and re-strapping
Demand:Rs.2,26,659/- charges,
documentation
SCN dated 24.07.2009. charges.

3. 4340-4341/2014 Period: 01.04.2004 to Customs Examination 31.03.2008 Charges, Misc.

CST v. Suraj Expenses, Sundry
Forwarders Demand: Rs. 6,35,071/- expenses, strapping
as confirmed in the O-I- and re-strapping
O. The charges,
Commissioner(Appeals) documentation set aside the demand charges.

on the reimbursable

expenses received
under the category
“Clearing & Forwarding
Agent” Service relation
to 1.04.2004-
17.04.2006 and
confirmed the remaining
demand.

4. 8056/2015 Not Available

CST v. Suraj
Forwarders

5. T.P.(C) No. A Transfer Petition for CFS charges, steamer
10431045/2017 transferring W.P. Nos. agent charges,
20832, 14521 and delivery order charges,
UOI v. Sri 20590 of 2016 pending Airport/Customs
Chidambaram & before Hon’ble High charges [page 25-
Ors. Court at Madras. 26/para C]

SCNs raised demands Airline/steamer
for Rs. 37.13 lacs and charges, storage and
Rs. 53.30 lacs which handling charges,
were dropped by the O- packing charges,
I-O. However on transport charges,
appeals the O-I-O was fumigation charges,
set aside, hence W.P’s insurance survey
were filed. charges, original
certificate charges
[pages 62-62]

Charges paid to:
Steamer agent,
Custom Freight
Station, Airport
Authority of India and
Transporters [page
106-107]

6. 7688/2014 Period: 01.10.2003 to Customs Examination
31.03.2008 Charges, Misc.
CST v. Shree Expenses, Sundry
Gayatri Clearing [pre and post coming expenses, strapping
Agency into effect of impugned and re-strapping
Rule 5 on 01.06.2007] charges,
documentation
Demand: Rs. 9,65,652/- charges.

SCN issued on
21.04.2009. O-I-A dated

31.07.2013 set aside
demand for the period
18.04.2006-31.03.2008
in view of circular dated
06.06.1997.
7. 7685/2014 Period:2004-05 & 2007- CMC charges,
08 CONCOR, GSEC,
Comm. of Transportation
Customs v. The Adjudicating charges, Air and sea
Ramdas Pragji Authority held that no freight, Custom Duty,
Forwarders Pvt. Service Tax was Custom Cess,
Ltd. payable on fumigation charges,
reimbursable amount bottom paper, wooden
prior to 18.04.2006. the etc. handling charges, Circular dated labour expenses, 06.06.1997 lost its sundry charges, airport validity after charges, introduction of Rule 5. documentation Hence the ST was charges, photocopying recoverable thereafter. charges etc. [page 181-182]

8. T.P.(C) 1932- Period: April 2006- Harbour/Airport 1934/2017 March 2009 Authority of India/CFS/CCTL and CST v. Green delivery order charges, Channel Cargo harbour dues, seal Care verification, warehouse/godown charges.

D. Site Formation and clearance, excavation and earth moving and demolition services: Assessees conduct drilling, blasting, excavation, loading, transport etc. of overburdened at open cast Mines. Issue is whether value of Goods/material service u/s.

65(97a), is to be included in ‘Gross Amount’ u/s 67 of Finance Act for the purpose of S.T.

The impugned orders follow the decisions in Bhayana Builder Intercontinental.

Sl.No. Civil Appeal Facts Reimbursable claimed
details as not includible
1. 6864/2014 Period: 01.02.2005- Value of Diesel and
CCE & ST v. 31.03.2009 explosives supplied
S.V. Engineering free of cost by service
Demand: Rs. recipient.
74,14,396/- and Rs.
12,26,38,376/-

2. 6865/2014 Period: 01.04.2009- Value of Diesel and
CCE & ST v. 31.03.2010 explosives supplied
S.V. Engineering free of cost by service
Demand: Rs. recipient.
87,63,595/-

3. 4356-4537/2016 Value of diesel oil and
explosives supplied
CCE&ST v. S.V. free of cost by service
Engineering recipient.

4. 5130/2016 Demand of Rs. Value of explosives and
18,85,88,959/- relating diesel oil supplied free
CCE & ST v. to period 01.06.2008 to of cost by service
Sushree Infra 31.03.2012 recipient.

SCN dated 01.10.2012
confirmed by O-I-O
dated 04.05.2011

5. 4975/2016 Period: October 2008 to Value of explosives and November 2008 diesel oil supplied free CCE & ST v. of cost by service Gulf Oil Demand: Rs. recipient.

50,54,746/-

6. 5453/2016 Period: Mar’08 to Mar’ Value of explosives and 2012 diesel oil supplied free CCE & ST v. of cost AMR India Demand:

Rs.57,74,30,683/-
7. 10223- Period: Apr’09 to Jan’10 Value of diesel oil 10224/2017 & February 2010 to supplied free of cost September 2010 CCE & ST v.
Mehrotra Demand:Rs.21,48,835/-
Buildcon + Rs. 18,06,655/-

5444/2017 Not available Value of diesel oil
8. supplied free of cost
CCE & ST v.
Mehrotra
Buildcon

E.

Sl. Civil Appeal Facts Reimbursable claimed
No. details as not includible
1. 10626- Period:Apr’04 to Mar’06 Hiring of venue,
10627/2017 merchandise, artists,
[prior to coming into travel, courier, food and
effect of impugned Rule beverages,
5 on 01.06.2007] administrative
expenses, [page 76
Demand:Rs.24,70,790/- @78]

SCN dated 22.10.2008

Non-payment of Service
Tax on the amount
received as
reimbursement by way
of debit notes in
addition to amount
charged through
invoices for providing
‘Event Management
Service’, Section 65(40)
and Section 65(90)(zu)
[page 83]

21) Undoubtedly, Rule 5 of the Rules, 2006 brings within its sweep

the expenses which are incurred while rendering the service and are reimbursed, that is, for which the service receiver has made the payments to the assessees. As per these Rules, these reimbursable expenses also form part of ‘gross amount charged’.
Therefore, the core issue is as to whether Section 67 of the Act permits the subordinate legislation to be enacted in the said manner, as done by Rule 5. As noted above, prior to April 19, 2006, i.e., in the absence of any such Rule, the valuation was to be done as per the provisions of Section 67 of the Act.
22) Section 66 of the Act is the charging Section which reads as under:

“there shall be levy of tax (hereinafter referred to as the service tax) @ 12% of the value of taxable services referred to in sub-clauses …..of Section 65 and collected in such manner as may be prescribed.”
23) Obviously, this Section refers to service tax, i.e., in respect of those services which are taxable and specifically referred to in various sub-clauses of Section 65. Further, it also specifically mentions that the service tax will be @ 12% of the ‘value of taxable services’. Thus, service tax is reference to the value of service. As a necessary corollary, it is the value of the services which are actually rendered, the value whereof is to be ascertained for the purpose of calculating the service tax payable thereupon.
24) In this hue, the expression ‘such’ occurring in Section 67 of the Act assumes importance. In other words, valuation of taxable services for charging service tax, the authorities are to find what is the gross amount charged for providing ‘such’ taxable services.

As a fortiori, any other amount which is calculated not for providing such taxable service cannot a part of that valuation as that amount is not calculated for providing such ‘taxable service’.

That according to us is the plain meaning which is to be attached to Section 67 (unamended, i.e., prior to May 01, 2006) or after its amendment, with effect from, May 01, 2006. Once this interpretation is to be given to Section 67, it hardly needs to be emphasised that Rule 5 of the Rules went much beyond the mandate of Section 67. We, therefore, find that High Court was right in interpreting Sections 66 and 67 to say that in the valuation of taxable service, the value of taxable service shall be the gross amount charged by the service provider ‘for such service’ and the valuation of tax service cannot be anything more or less than the consideration paid as quid pro qua for rendering such a service.

25) This position did not change even in the amended Section 67 which was inserted on May 01, 2006. Sub-section (4) of Section 67 empowers the rule making authority to lay down the manner in which value of taxable service is to be determined. However, Section 67(4) is expressly made subject to the provisions of sub-

section (1). Mandate of sub-section (1) of Section 67 is manifest, as noted above, viz., the service tax is to be paid only on the services actually provided by the service provider.

26) It is trite that rules cannot go beyond the statute. In Babaji Kondaji Garad, this rule was enunciated in the following manner:

“Now if there is any conflict between a statute and the subordinate legislation, it does not require elaborate reasoning to firmly state that the statute prevails over subordinate legislation and the bye-
law, if not in conformity with the statute in order to give effect to the statutory provision the Rule or bye-law has to be ignored. The statutory provision ahs precedence and must be complied with.”

27) The aforesaid principle is reiterated in Chenniappa Mudaliar holding that a rule which comes in conflict with the main enactment has to give way to the provisions of the Act.

28) It is also well established principle that Rules are framed for achieving the purpose behind the provisions of the Act, as held in Taj Mahal Hotel:

‘the Rules were meant only for the purpose of carrying out the provisions of the Act and they could not take away what was conferred by the Act or whittle down its effect.”

29) In the present case, the aforesaid view gets strengthened from the manner in which the Legislature itself acted. Realising that Section 67, dealing with valuation of taxable services, does not include reimbursable expenses for providing such service, the Legislature amended by Finance Act, 2015 with effect from May 14, 2015, whereby Clause (a) which deals with ‘consideration’ is suitably amended to include reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service. Thus, only with effect from May 14, 2015, by virtue of provisions of Section 67 itself, such reimbursable expenditure or cost would also form part of valuation of taxable services for charging service tax. Though, it was not argued by the learned counsel for the Department that Section 67 is a declaratory provision, nor could it be argued so, as we find that this is a substantive change brought about with the amendment to Section 67 and, therefore, has to be prospective in nature. On this aspect of the matter, we may usefully refer to the Constitution Bench judgment in the case of Commissioner of Income Tax (Central)-I, New Delhi v. Vatika Township Private Limited8 wherein it was observed as under:

“27. A legislation, be it a statutory Act or a statutory rule or a statutory notification, may physically consists of words printed on papers. However, conceptually it is a great deal more than an ordinary prose. There is a special peculiarity in the mode of verbal communication by a legislation. A legislation is not just a series of statements, such as one finds in a work of fiction/non-fiction or even in a judgment of a court of law. There is a technique required to draft a legislation as well as to understand a legislation. Former technique is known as legislative drafting and latter one is to be found in the various principles of “interpretation of statutes”. Vis-à-vis ordinary prose, a legislation differs in its provenance, layout and features as also in the implication as to its meaning that arise by presumptions as to the intent of the maker thereof.
28. Of the various rules guiding how a legislation has to be interpreted, one established rule is that unless a contrary intention appears, a legislation is presumed not to be intended to have a retrospective operation. The idea behind the rule is that a current law should govern current activities. Law passed today cannot apply to the events of the past. If we do something today, we do it keeping in view the law of today and in force and not tomorrow’s backward adjustment of it. Our belief in the nature of the law is founded on the bedrock that every human being is entitled to arrange his affairs by relying on the existing law and should not find that his plans have been retrospectively upset. This principle of law is known as lex prospicit non respicit: law looks forward not backward. As was observed in Phillips v. Eyre [(1870) LR 6 QB 1] , a retrospective legislation is contrary to the general principle that legislation by which the conduct of mankind is to be regulated when introduced for the first time to deal with future acts ought not to change the character of past transactions carried on upon the faith of the then existing law.
29. The obvious basis of the principle against retrospectivity is the principle of “fairness”, which must be the basis of every legal rule as was observed in L’Office Cherifien des Phosphates v. Yamashita-Shinnihon Steamship Co. Ltd.
Thus, legislations which modified accrued rights or which 8 (2015) 1 SCC 1 impose obligations or impose new duties or attach a new disability have to be treated as prospective unless the legislative intent is clearly to give the enactment a retrospective effect; unless the legislation is for purpose of supplying an obvious omission in a former legislation or to explain a former legislation. We need not note the cornucopia of case law available on the subject because aforesaid legal position clearly emerges from the various decisions and this legal position was conceded by the counsel for the parties. In any case, we shall refer to few judgments containing this dicta, a little later.”

30) As a result, we do not find any merit in any of those appeals which are accordingly dismissed.

CIVIL APPEAL NO. 6865 OF 2014, CIVIL APPEAL NO. 6864 OF 2014, CIVIL APPEAL NO. 4975 OF 2016, CIVIL APPEAL NO. 5130 OF 2016 AND CIVIL APPEAL NOS. 4536-4537 OF 2016

31) In the aforesaid appeals, the issue is as to whether the value of free supplies of diesel and explosives in respect of the service of ‘Site Formation and Clearance Service’ can be included for the purpose of assessment to service tax under Section 67 of the Act.

These assessees had not availed the benefit of aforesaid Notifications Nos. 15/2004 and 4/2005. Therefore, the issue has to be adjudged simply by referring to Section 67 of the Act. We have already held above that the value of such material which is supplied free by the service recipient cannot be treated as ‘gross amount charged’ and that is not the ‘consideration’ for rendering the services. Therefore, value of free supplies of diesel and explosives would not warrant inclusion while arriving at the gross amount charged on its service tax is to be paid. Therefore, all these appeals are also dismissed.

TRANSFER PETITION (CIVIL) NOS. 1043-1045 OF 2017 TRANSFER PETITION (CIVIL) NOS. 1932-1934 OF 2017

32) These transfer petitions are allowed and the writ petitions mentioned in the prayer clause, which are pending before the High Court of Madras, are transferred to this Court.

33) The transferred writs are also disposed of in terms of the judgment rendered above in Civil Appeal No. 2013 of 2014 and other connected matters.

………………………………………J.

(A.K. SIKRI) ………………………………………J.

(ASHOK BHUSHAN) NEW DELHI;

MARCH 07, 2018.

CBDT Office Memorandum On Decentralization Of Cases Under Insolvency & Bankruptcy Code 2016

MASTI

The CBDT has issued an Office Memorandum with regard to cases under Insolvency & Bankruptcy Code 2016. The OM harmonizes the guidelines under the OM dated. 16.01.2018 with Circular No. 5/2009 dated 02.07.2009 of CBDT.

It is stated by the CBDT that all pending legal processes relating to sanctioned schemes by BIFR will continue to be handled by Pr. DGIT (Admn. &TPS) as stipulated in circular no. 5/2009 dated. 02.07.2009.

It has been further clarified in the said office memorandum of the CBDT that the transfer to jurisdictional Pr.CCIT will be made only after the order is passed after processing of sanctioned schemes by the Pr.DGIT(Admn.&TPS) as prescribed in circular no. 05/2009 dated. 02.07.2009.

Text of Office Memorandum dated 7th March, 2018 issued by the CBDT

F. No. 385/04/2018-IT(Budget)
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
North Block, New Delhi 07th March, 2018

OFFICE MEMORANDUM

Subject: Decentralization of handling of cases under Insolvency & Bankruptcy Code 2016- regarding.

The undersigned is directed to refer to Board’s OM of even number dated. 16.01.2018 on the above subject. In order to harmonize the guidelines under the OM dated. 16.01.2018 with Circular No. 5/2009 dated 02.07.2009 of CBDT, pars 2 (iii) of the said OM dated. 16.01.2018 is partially modified, which may now be read as under:

“All the pending legal processes relating to sanctioned schemes by BIFR will continue to be handled by Pr. DGIT (Admn. &TPS) as stipulated in circular no. 5/2009 dated. 02.07.2009. The transfer to jurisdictional Pr.CCIT will be made only after the order is passed after processing of sanctioned schemes by the Pr.DGIT(Admn.&TPS) as prescribed in circular no. 05/2009 dated. 02.07.2009”.

This issues with the approval of Member (Revenue & TPS), CBDT.

(Sandeep Singh)
Under Secretary to the Govt. of India
Tel: 011-23094182

All the Pr. CCsIT/CCsIT Pr. DGsIT/DGsIT

Copy to: –

1. ADG (Recovery), Directorate of Income-tax, Recovery and TDS.
2. Commissioner (A&J), CBDT
3. Additional Director of IT (Database Cell), CBDT, (Fax no.011-23593359, e-mail: dbc.cbdt@incometax.gov.in) for uploading on the website irsofficersonline.gov.in.