Assignment of Leasehold Rights is Immovable Property under GST: Guj HC 

Introduction 

In a recent and much discussed judgment, the Gujarat High Court has held that assignment by sale and transfer of leasehold rights of a plot of land amounts to transfer of benefits arising out of immovable property. The High Court concluded that the transfer would not amount to a supply under Section 7, CGST Act, 2017 read with Schedule II of the Act.  

My usual lament is about length of judgments. This judgment is 280 pages and could very well have been less than half. But the Judges felt the need to reproduce the entirety of arguments and copiously cite precedents relied on by the parties to the case, even if several of them had no proximate bearing on the High Court’s conclusion. While this lament may sound repetitive, I believe it is important to constantly strive for more brevity and more clarity in our judgments.   

Regardless, a quick summary of the case is below. 

Issue before the Gujarat High Court 

The brief facts of case are: Gujarat Industrial Development Corporation (‘GIDC’). GIDC acquires land and develops the same for industrial estate by creating infrastructure such as road, drainage, etc. and allots a plot of land on long term lease for 99 years to a person/entity. A registered deed is executed between GIDC and the lessee. The lease deed allows the lessee to further assign the leasehold rights and any interest in the land to a third person with approval of GIDC. In the impugned case, Gujarat Chamber of Commerce and Industries was the lessee and its case was that the transfer of leasehold rights to a third party did not attract GST. 

In the impugned case, the land was leased to the lessee, and the latter constructed a building on it. And the leasehold rights that were assigned related to both the land and the building so constructed.  The High Court thus framed the issue specifically as: whether assignment of leasehold rights alongwith the building thereon would be covered by the scope of supply to levy GST as per the CGST Act, 2017 or not?  

Arguments and Relevant Provisions 

The crux of lessee/petitioner’s argument was that leasehold rights are benefits arising out of land. A succinct logical flow of the argument can be stated as follows: 

  1. The definitions of immovable property under the General Clauses Act, 1897 and Registration Act, 1908 both include ‘benefits that arise out of land’.   
  2. Leasehold rights are benefits arising out of an immovable property. 
  3. Thus, transfer/assignment of leasehold rights amounts to transfer of an immovable property. 
  4. Since transfer of immovable property is not within the scope of ‘supply’ as defined under CGST Act, 2017 it cannot be subjected to GST. 

The Revenue’s case was that while sale immovable property is outside the scope of supply of GST laws, interest in immovable property like leasehold rights which is transferred by way of sale is a ‘supply of services’ is liable for GST. The Revenue further argued that transfer of right to occupy a land by GIDC to lessee constitutes a supply of service. And that the nature of interest in land would not change merely because the lessee makes an absolute transfer of leasehold rights to a third party. 

To buttress its argument that leasehold rights were benefits arising out of a land, the petitioner’s relied on a galaxy of judgments in the context of TPA, 1882 where courts have elaborated on what constitutes a movable or immovable property.

Supply has been defined under Section 7, CGST Act, 2017 to include sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration in the course or furtherance of business. Further, Clause 5(a), Schedule II, CGST Act, 2017 states that renting of immovable property shall be treated as supply of services. Thus, while renting/leasing is within the scope of supply the assignment of leasehold rights is not specifically included in the definition of supply.  

Reasoning and Conclusion 

The Gujarat High Court did not accept the Revenue’s argument. The High Court noted that the first transaction between GIDC and lessee merely transferred the right of possession to the latter as the right of ownership of the plot remained with GIDC. The second transaction wherein the lessee assigned all the leasehold rights in the property to a third party involved transfer of absolute rights. The High Court added: 

when the lessee-assignor transfers absolute right by way of sale of leasehold rights in favour of the assignee, the same shall be transfer of “immovable property” as leasehold rights is nothing but benefits arising out of immovable property which according to the definition contained in other statutes would be “immovable property”. Therefore, the question of supply of services or place of supply of services does not arise … (para 52)

Thus, transfer of land for lease of 99 years by GIDC to lessee is taxable under GST as per clause 5(a), Schedule II, CGST Act, 2017. But transfer of such leasehold rights would be nothing but transfer of immovable property since the consideration paid is as much an alienation as sale or mortgage. (para 64) The High Court also invoked the meaning of term ‘assignment’ to mean that it includes transfer of all rights of a property, the whole interest with rights and liability to sue and be sued. (para 67-68) And the implication of the above understanding of assignment was that the lessee was removed from the picture on transfer of leasehold rights.   

But can the lessee transfer a title superior to the one they received? If the lessee only received leasehold rights from GIDC can it transfer/assign absolute rights to a third party? To this end, the High Court emphasised that GIDC only leased the plot of land and the lessee constructed a building and developed a land for the purpose of business. The entire land and building was therefore transferred along with leasehold rights and interests in land which is a capital asset in the form of immovable property. The lessee, therefore, earned profits by operating a building which constitutes ‘profit a pendre’ which in turn constitutes as immovable property as per the Anand Behra case

Legislative Intent or Strict Interpretation? 

The Gujarat High Court has relied on both: strict interpretation of tax statutes and legislative intent to hold that assignment of land the building does not amount to a supply under GST. Using both interpretive techniques in a single judgment is a bit strange. The default approach in interpreting tax statutes is – strict interpretation. Courts usually resort to discovering legislative intent if there is ambiguity or uncertainty in the relevant provisions. In the impugned case, the Gujarat High Court declared that it must follow strict interpretation of law since regard must be given to clear meaning of the terms since entire issue is governed by language of the provisions. (para 58) And yet in the succeeding paragraphs the High Court goes into legislative intent and history in detail before arriving at its conclusion. (paras 60-62)

The Gujarat High Court specifically invoked legislative intent when it noted that when legislative intent is not to levy GST on sale of immovable property, the Revenue’s argument of treating assignment of leasehold rights as equal to renting of immovable property would be contrary to legislative intent. (Para 82) This issue could have been easily adjudicated upon by relying on the strict interpretation of statutes by holding that Clause 5(a), Schedule II, CGST Act, 2017 only mentions ‘renting of immovable property’ and cannot by interpretive gymnastics be held to include ‘assignment of leasehold rights’.   

 This interpretive approach where the High Court was trying to rely on two different interpretive methodologies without reconciling them is indicative of a ‘let cover all bases’ approach instead of a narrow inquiry into the issue at hand.        

Conclusion 

It is important that the ratio of this case is understood in the specific context of this case. The specific context is that the lessee received leasehold rights of a plot of land from GIDC. The lessee in turn developed the land, constructed a building, and assigned the leasehold rights over the land and building to a third party. The High Court stressed on the development of land made by the lessee after receiving the leasehold rights and that the assignment by sale by the lessee was of both the land and building. The conclusion may have been different if the land received on land was further leased to a third party on ‘as is where is’ basis.      

Delhi High Court Orders Refund of Illegally Collected GST

The Delhi High Court in a recent order[1] followed the Gujarat High Court’s judgment in M/s Cosmol Energy Private Limited case[2] wherein it held that Section 54, CGST Act, 2017 is not applicable for illegally collected GST or GST paid under a mistake. Section 54 prescribes an outer time limit of two years for filing an application for refund and the High Court held that the said time limit would not apply in the impugned case since the assessee was under the mistaken belief that its services were chargeable to GST.  

Facts 

The petitioner in the impugned case, Delhi Metro Rail Corporation (‘DMRC’) provided services to Surat Municipal Corporation wherein it prepared a detailed project report for the purpose of development of a rail project in the City of Surat. The invoice raised by DMRC was of Rs 19,04,520/- and it included GST of Rs 2,90,520/-. However, the City of Surat paid DMRC only Rs 16,14,000/- and did not pay the GST amount included in the invoice by DMRC. 

However, DMRC to ensure compliance with its statutory obligations paid a sum of Rs 2,90,520/- as GST to the Revenue Department. DMRC was latter informed by the Surat Municipal Corporation that the services billed by it were not exigible to GST under the relevant Notification, i.e., Notification 12/2017 – Central Tax (Rate) dated 28.06.2017. DMRC there after filed an application for refund which was rejected by the Revenue Department on the ground that the application was filed after two years had elapsed.

DMRC’s argument against the rejection of its refund application was that it would amount to violation of Article 265 of the Constitution since it would amount to collection of tax without the authority of law. 

Delhi High Court Relies on M/s Cosmol Energy Case

The Gujarat High Court in M/s Cosmol Energy case upheld the petitioner’s claim for refund of ocean freight paid on reverse charge basis after Supreme Court in Mohit Minerals case declared the said levy to be unconstitutional. The petitioner’s application for refund of Integrated GST was refused on the ground that it was filed after the relevant date prescribed under Section 54, CGST Act, 2017 similar to the facts of the impugned case. In M/s Cosmol Energy case, the Gujarat High Court held that: 

Section 54 of the CGST Act is applicable only for claiming refund of any tax paid under the provisions of the CGST Act and/or the GGST Act. The amount collected by the Revenue without the authority of law is not considered as tax collected by them and, therefore, Section 54 is not applicable. (para 7) 

The Gujarat High Court also quoted Article 265 of the Constitution to state that no tax shall be collected and levied except by authority of law and the State was bound to refund the tax collected illegally. 

In the impugned case, the Delhi High Court relied on the Gujarat High Court’s observations in M/s Cosmol Energy case, noted the fact that the said decision had not been appealed against by the State, indicating the State’s acceptance of it, and observed that DMRC was not liable to pay GST on the services rendered by it and the GST deposited by the DMRC ‘on an erroneous belief that payment for services rendered by it were chargeable to tax, cannot be retained by the respondents.’ (para 12) The High Court was categorical in its conclusion that Section 54 does not apply where GST is not chargeable and it is established by the assessee that an amount has been deposited under a mistake of law. 

Conclusion 

It is one of the fundamental tenets of the Constitution that no tax can be levied and collected except by the authority of law as succinctly stated in Article 265 of the Constitution. The Delhi High Court has reiterated a long line of jurisprudence, but the law on the point remains at a stage of infancy under GST. Hopefully, the combined effect of the Gujarat High Court and the impugned judgment of the Delhi High Court would provide greater clarity to the taxpayers going forward. 


[1] Delhi Metro Rail Corporation Ltd v Additional Commissioner, CGST Appeals-II and Ors 2023: DHC: 6874:DB. 

[2] Cosmol Energy Private Limited v State of Gujarat 2020 (12) TR 4336.

Gujarat HC Quashes SCN for Lack of Reasons and Violation of Principles of Natural Justice

Gujarat High Court has in a recent judgment[1] quashed a showcause notice (‘SCN’) and the subsequent order on the ground that the reasons for cancellation of the assessee’s registration are not decipherable. The High Court also added that the SCN is quashed because of violation of principles of natural justice. 

Facts 

The petitioner in the impugned case was registered under CGST Act, 2017 and had been regularly filing GST returns. The petitioner claimed that it received a SCN on 20.01.2023 via GSTN portal but did not receive the SCN or any other document or material at its registered place of business. The petitioner claimed that it was given seven working days to file a reply and was instructed to appear personally on 27.01.2023 to file the reply. The petitioner filed a reply by the said date and on 22.06.2023 received a non-speaking order informing it that its registration was cancelled w.e.f. 13.03.2021. 

The SCN was impugned on the ground that it was vague and on the ground that no reason had been assigned for cancellation of the assessee’s registration. The State, on the other hand, argued that the petitioner had obtained registration through fraud and misrepresentation but did not elaborate further as to the nature of fraud or misrepresentation.   

High Court Decides 

The Gujarat High Court reproduced in detail the procedure of registration, cancellation of revocation of registration enunciated in Aggarwal Dyeing and Printing Works case.[2] To put it pithily, the Gujarat High Court in Aggarwal Dyeing and Printing Works case had stated that the settled legal position is that assignment of reasons by adjudicating authority is imperative in nature. And that the said reasons are the heart and soul of decision making. The High Court stated that all evidence, documents must be considered by the decision making authority and reasons assigned in support of the decision must be cogent, clear and concise.

The Gujarat High Court in the impugned case stated that in Aggarwal Dyeing and Printing Works case the Court’s was clear: if a cryptic SCN is issued and reasons for cancellation of registration are not decipherable, then it amounts to violation of principles of natural justice. 

Relying on the aforestated ratio in Aggarwal Dyeing and Printing Works case, the Gujarat High Court in the impugned case held that:

… the show cause notice and the impugned order are quashed and set aside. The petition is allowed solely on the ground of violation of principles of natural justice. The show cause notice as well as the order cancelling the registration are quashed and set aside with a liberty reserved to the respondent to issue a fresh notice with particulars of reasons incorporated with details, and thereafter, to provide reasonable opportunity of hearing to the writ petitioner and to pass appropriate speaking order on merits. (para 8) 

The impugned decision of the Gujarat High Court is another attempt to introduce transparency, adherence to principles of natural justice and reasonableness before cancelling registration of taxpayers. It is instructive how the State raises the argument that the taxpayer obtained registration by fraud without backing the argument without any cogent or other evidence leaving the impression that the argument was used as a fig leaf for an ill thought and arbitrary action. Whether the High Court’s impugned decision will have any impact in the State’s behaviour will be known in the future, though the hope for it is bleak.   


[1] Hardik KaushikBhai Joshi v Union of India TS-485-HCGUJ-2023-GUJ. 

[2] Aggarwal Dyeing and Printing Works v State of Gujarat [2022] 137 taxmann.com 332 (Gujarat). 

Limits of Deeming Fiction: Intermediaries under GST-I

Constitutionality of Section 13(8)(b), IGST Act, 2017

Introduction

Constitutionality of Section 13 (8)(b), IGST Act has attracted the attention of different Courts. The reason for suspect constitutionality of Section 13 (8)(b), IGST Act is that incorporates a deeming fiction whereby the place of supply for services by an intermediary is in India, i.e., place of service provider instead of the place of recipient. The petitioner’s case was that Section13(8)(b), IGST Act departs from the destination-based character of GST, violates Fundamental Rights under Art 14 and Art 19(1)(g) of the Constitution, and is beyond the Parliament’s competence. There are multiple and varied judicial opinions on the issue and I will explore them in a two-part post. In the first part of this post, I will focus on the judgment pronounced by the Gujarat High Court and by a 2-Judge Bench of the Bombay High Court, both of which leave a lot to be desired. I argue that both decisions engage with the underlying issue superficially and adopt less than adequate reasoning to support their conclusions.    

The Gujarat High Court Upholds GST on Intermediaries

In Material Recycling Association of India case[1], petitioners challenged the constitutional validity of Section 13 (8)(b), IGST Act, 2017. Petitioners were intermediaries providing services to their clients located outside India and earning in foreign convertible currency. As per Section 13 (8)(b), IGST Act, 2017 if a supplier provides intermediary service to a person situated outside India, place of supply of services is deemed to be where the supplier is located. This deeming fiction thereby treats such a transaction as liable to GST. The petitioner challenged the provision as ultra vires of Art 265, 286, Art 14, and Art 19 of the Constitution. Petitioner’s various arguments were underpinned by the central idea that their services constituted as export of services. And export of services or goods could not be subjected to GST since it was a destination-based tax whereunder exports were zero-rated. Further, since the supply of services took place outside India the Parliament lacked competence to enact such a provision.

The Gujarat High Court’s analysis is pithy, and essentially gives a free pass to the legislature by stating that the petitioner’s services could not be considered as an export of services ‘in order to levy CGST and SGST’ and that:

            … it would not qualify to be export of services, more particularly when the legislature has thought it fit to consider the place of supply of services as place of person who provides such service in India. (para 66)

It then curiously did not even agree with the petitioner that the provision in question was a deeming provision and instead upheld the constitutionality of the provision by relying on the fact that a similar situation existed in the pre-GST regime and noted: 

            Therefore, this being a consistent stand of the respondents to tax the service provided by intermediary in India, the same cannot be treated as “export of services” under the IGST Act, 2017 and therefore, rightly included in Section 13(8)(b) of the IGST Act to consider the location of supplier of service as place of supply so as to attract CGST and SGST. (para 67)

Both reasons collapse under the burden of scrutiny. First, let’s decode ‘legislature’s wisdom’. As per the Gujarat High Court, the legislature ‘thought it fit’ to include various transactions in the scope of GST to maximize revenue collection. Legislature enacting provisions to increase revenue collection in no way precludes Courts from examining if the provisions under challenge transgress the Constitution. In fact, one would argue that the primary function of a constitutional Court is to examine if the legislature is enacting provisions within the constitutional limits. For example, in this case, it was incumbent on the Gujarat High Court to examine if the impugned provision satisfied the requirements of Art 286 and/or Art 269A of the Constitution, and whether Art 14 and Art 19(1)(g) were not violated; but the judgment is completely bereft of any such analysis. 

The second reason proffered by the Gujarat High Court was that a similar legal position prevailed in the pre-GST regime. To conclude that a similar provision existed in the pre-GST regime is evidence of the constitutionality of a provision enacted under the IGST Act, 2017 is an unwarranted and unreasonable statement especially when the High Court could not cite any precedent that squarely covered the issue. The Gujarat High Court’s reliance on the fact that similar provision existed in service tax regime to conclude that the Revenue Department has a ‘consistent stand’ and creates a presumption of constitutionality in favour of the provision is a dereliction of duty by a constitutional Court. And, even if there was a judicial decision that upheld the constitutionality of the pre-GST provision, it was incumbent on the Gujarat High Court to examine if the decision remained valid after the constitutional changes that accompanied GST. Nonetheless, the Gujarat High Court’s decision did not conclusively settle this matter as a similar matter was argued before a Division Bench of the Bombay High Court.       

Division Bench of The Bombay High Court Issues a Split Verdict 

The Bombay High Court in Dharmendra M. Jani case[2] decided a similar petition almost a year after the Gujarat High Court’s decision in Material Recycling Association of India case, but it ended in a stalemate with the Division Bench rendering a split decision.  

Justice Ujjal Bhuyan, held that Section 13 (8)(b), IGST Act, 2017 was unconstitutional and rested his conclusion on three observations. First, he examined the aforesaid provision on the touchstone of Art 286 of the Constitution and noted that the supply of service by an intermediary was outside Maharashtra and India. As per him, Section 13 (8)(b), IGST Act, 2017 had created a deeming fiction treating the export of service by an intermediary as an intra-State supply and it was definitely ‘an artificial device created to overcome a constitutional embargo.’ (para 49) Second, he observed that creating a deeming provision such as Section 13(8)(b) where the location of the recipient of service provided by an intermediary though outside India has been treated in India ‘runs contrary to the scheme of the CGST Act as well as the IGST Act besides being beyond the charging sections of both the Acts.’ (para 54) His third reason referred to the transaction’s lack of nexus with India and he concluded that: 

            … section 13(8)(b) of the IGST Act not only falls foul of the overall scheme of the CGST Act and the IGST Act but also offends Articles 245, 246A, 269A and 286(1)(b) of the Constitution. The extra-territorial effect given by way of section 13(8)(b) of the IGST Act has no real connection or nexus with the taxing regime in India introduced by the GST system. (para 56)   

While Justice Bhuyan’s opinion was correct in identifying the lack of nexus and that the provision undermined GST’s fundamental principle of destination-based consumption tax, he failed to clearly articulate as to ‘how’ Section13(8)(b), IGST Act, 2017 contravened Art 286 of Constitution. Art 286(1) prevents the State from levying GST on a supply that takes place outside the State or a supply that takes place in the course of import of goods or services into India’s territory or their export out of India’s territory. While Art 286(2) empowers the Parliament to determine principles for determining when a supply of goods or services takes place in any of the two ways mentioned in Art 286(1). It is unclear in Justice Bhuyan’s opinion as to which aspect of Art 286 does Section 13 (8)(b), IGST Act, 2017 specifically contravene and what is the constitutional embargo that the legislature is trying to circumvent. 

At the same time, Justice Bhuyan’s opinion was notable for understanding that while the source of legislative power regarding the inter-State supply of goods or services could be traced to Art 246A and Art 269A of the Constitution, there were constitutional restraints on such power, such as Art 286 of Constitution, and the impugned provision needed to be examined on those touchstones. More importantly, unlike the Gujarat High Court, he did not accept the argument that the existence of a similar provision under the service tax regime precluded a challenge to Section 13 (8)(b), IGST Act, 2017. He instead stated that the validity of Section 13 (8)(b) read with Section 8 of the IGST Act, 2017 had to be examined on the touchstone of relevant constitutional provisions and not by relying on previous legal provisions. Though he fell short of clearly specifying the nature and extent of constitutional transgression.  

Justice Abhay Ahuja in his separate opinion upheld the constitutionality of Section 13 (8)(b), IGST Act, 2017. He gave a ringing endorsement to the Gujarat High Court’s decision in Material Recycling Association of Indiacase, though he added his reasons, which were equally if not less convincing. I will only briefly mention his reasons since his engagement with the petitioner’s argument is almost cavalier. 

Justice Abhay Ahuja pithily observed that Section 13 (8)(b), IGST Act, 2017 was not contrary to the destination-based principle of GST. He observed that since under GST taxation is on supply by intermediaries and the same was characterized as an inter-State supply, there was no conflict thereby completely missing the thrust of the petitioner’s argument. He also incorrectly stated that the definition of export of services being a general provision would be inapplicable since there was a specific provision defining intermediary. Again, not realizing that the two provisions operated independently and performed different functions. 

Justice Ahuja’s examination of the constitutional dimension is worth discussing in more detail. He began by interpreting the scope of Parliament’s power under Art 269A and Art 286 of the Constitution too widely. He noted that while imports had been deemed to be inter-State trade or commerce under IGST Act, 2017, Art 269A of the Constitution did not take away the power of the Parliament to stipulate ‘any other supply’ to be a supply in the course of inter-State trade or commerce. (para 103) Art 269A(5) specifically provides that:

            Parliament may, by law, formulate the principles for determining the place of supply, and when a supply of goods or of services, or both takes place in the course of inter-State trade or commerce.   

Clearly, Art 269A (5) of the Constitution empowers the Parliament to determine the situs/place of supply for inter-State trade or commerce. Thus, when Justice Ahuja says that Art 269A does not take away power to include any supply as inter-State trade or commerce, it should have been preceded by an examination if the Parliament by exercising its power under Art 269A(5) – to enact Section13(8)(b), IGST Act, 2017 – has acted within the scope of its power and has adhered to the limitations imposed by Art 286 of Constitution. Instead, he held that the ‘whole purpose’ of Art 286(2) of the Constitution was to empower Parliament to determine the situs of supply and since Section13(8)(b), IGST Act, 2017 specifically does that it could not be said to contravene Art 286 of Constitution. His understanding of the nature and purpose of Art 286(2) is partly wrong. And his conclusion about the constitutionality of Section 13 (8)(b), IGST Act, 2017 lacks any examination of the Parliament’s powers under Art 269A read with Art 286 of the Constitution. 

The reasoning adopted by both the Gujarat and the Bombay High Court only contributes to greater uncertainty on GST’s applicability to intermediaries. Further, we have no clarity on the role of Art 286 in the GST regime, no clear articulation on the interplay of Art 246A and Art 269A and a lack of appreciation as to whether and to what extent GST’s identity as a destination-based tax is supposed to constrain Parliament’s legislative power. Are no deviations allowed from the destination-based principle? If they are, on what grounds and to what extent?

Finally, both the Gujarat High Court and Justice Abhay Ahuja of the Bombay High Court endorsed the deeming fiction contained in Section13(8)(b), IGST Act, 2017 by stating that it was essential to bring such intermediary services within the scope of GST to raise revenue. Adopting a revenue-maximising approach is the prerogative of the legislature; but, from the standpoint of Courts, it is crucial that the provision in question is constitutional. The fact that the legislature is better placed to frame a tax policy cannot be cited as a reason to enact provisions that are unconstitutional. We need a more robust examination of the tax dimensions of the Constitution and not a judicial approach that uncritically endorses the view that the legislature deserves a wide leeway in enacting tax laws. Such an approach has a little analytical basis, presumes that the legislature is adequately examining each law minutely and certainly does not warrant giving short shrift to arguments based on constitutional law. 


[1] Material Recycling Association of India v Union of India & Others 2020-VIL-341-GUJ. 

[2] Dharmendra M. Jani v Union of India 2021 SCC OnLine Bom 839. 

Machinery Provisions Brook No Vested Rights: Supreme Court Holds that Amendment to Section 153C, IT Act, 1961 is Retrospective

On 6 April 2023, a Division Bench of the Supreme Court in Vikram Bhatia case[1], held that the amendment to Section 153C, IT Act, 1961 was retrospective in nature and would be applicable to searches conducted even before the date of amendment, i.e., 1.06.2015. The Supreme Court’s decision is another example of its deferential approach to the State in tax matters. The impugned case also highlights that the Revenue Department is not hesitant to argue that an amendment is retrospective on the pretext that the pre-amendment provision was interpreted contrary to legislative intent. An argument that the Supreme Court and other Courts have not scrutinized with necessary rigor.  

Background to Amendment of Section 153C, IT Act, 1961 

The relevant portion of Section 153C, as it stood before its amendment vide the Finance Act, 2015, provided that where the assessing officer is satisfied that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned belongs or belong to a person other a person against whom search is conducted, then such books of account or assets shall be handed over to the assessing officer having jurisdiction over the other person. And the other person may be issued notice and their income reassessed under Section 153-A, IT Act, 1961.   

The Delhi High Court in Pepsico India case[2] held that the words ‘belongs or belong to’ should not be confused with ‘relates to or refers to’. In this case, the Delhi High Court noted that if  the purchaser’s premises are searched and a registered sale deed is seized, it cannot be said that it ‘belongs to’ to the vendor just because his name is mentioned in the document. (para 16) The Delhi High Court’s interpretation meant that the assessing officer could only initiate proceedings against a third party if the incriminating material found during search proceedings ‘belonged to’ the third party and not merely ‘related to’ the third party. The Revenue Department’s stance was that the Delhi High Court’s interpretation did not align with the intent of the provision. Though the Revenue Department’s disagreement with the Delhi High Court’s ruling could also stem from the fact that its interpretation set a high threshold for the assessing officer to invoke Section 153C against a third party. 

To overcome the effect of the Delhi High Court’s judgment, Finance Act, 2015 amended Section 153C, and Section 153C(1)(b) now states that where the assessing officer is satisfied that any books of account or documents, seized or requisitioned, pertains or pertain to, or any information contained therein, relates to, person other than against whom search is conducted, then such books of account or assets shall be handed over to the assessing officer having jurisdiction having jurisdiction over the other person. And the other person may be issued notice and their income reassessed under Section 153-A, IT Act, 1961.   

The scope of Section 153C was clearly widened, the threshold to proceed against a third party was lowered with the phrase ‘belongs to’ being replaced with ‘relates to’. The expression ‘belongs to’ though continued to qualify money, bullion, jewellery or other valuable article or thing mentioned in Section 153C(1)(a).  

Interpretation of Amended Section 153C, IT Act, 1961      

The Supreme Court heard appeals from common judgment[3] of the Gujarat High Court pronounced in April 2019. The Gujarat High Court observed that though Section 153C was a machinery provision, but by virtue of its amendment new class of assessees were brought within the scope of the provision and it affected their substantive rights and resultantly Section 153C could not be interpreted to be a mere procedural/machinery provision. Further, the Gujarat High Court reasoned that the amended provision was much wider in scope as compared to its predecessor. The Gujarat High Court concluded that amendment to Section 153C shall not be given a retrospective effect, and no notices could be issued post-amendment of Section 153C for searches conducted before its amendment, i.e., 1.06.2015. Against this decision of the Gujarat High Court, the Supreme Court heard appeals filed by the Revenue Department.    

The precise question before the Supreme Court was whether amendment to Section 153C, IT Act, 1961 was retrospective? And whether Section 153C, IT Act, 1961 would be applicable to searches conducted before 1.06.2015, i.e., the date before amendment. The Supreme Court answered in the affirmative. There are several limitations in the Supreme Court’s approach, let me highlight a few below. 

First, the Supreme Court accepted the State’s argument that the amendment to Section 153C, IT Act, 1961 was ‘a case of substitution of the words by way of amendment’. (para 10.1) The Supreme Court cited numerous precedents to the effect without really explaining the basis on which it was deciphering that the amendment in question was a ‘substitution’ amendment. In fact, the Supreme Court adopted a broad brush approach and neglected to observe that even post-amendment Section 153C(1)(a) retains the phrase ‘belongs to’. Section 153C(1), after amendment vide the Finance Act, 2015 states that: 

Nothwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153, where the Assessing Office is satisfied that,-

  • any money, bullion, jewellery or other valuable article or thing, seized or requistioned, belongs to; or 
  • any books of account or documents, seized or requistioned, pertains or pertain to, or any information contained therein, relates to,   

a person other than the person referred to in section 153A, … (emphasis added) 

Clearly, both phrases ‘belong to’ and ‘relates to’ have been retained in Section 153C. And the afore cited portion of Section 153C provides reasonable basis to argue that the Finance Act, 2015 did not effectuate a ‘substitution amendment’ of Section 153C. The amendment only lowers the threshold to initiate the proceedings against the third person for certain kinds of documents and does not fully substitute the pre-amended provision.    

Second, the Supreme Court reasoned that Section 153C, IT Act, 1961 was a machinery provision and it must be construed to give effect to the purpose and object of the statute. (para 10.6) The Supreme Court then cited a host of decisions to support its stance that machinery provisions must be construed liberally. However, the decisions cited by the Supreme Court such as Calcutta Knitwears case[4], hold that machinery provisions should be interpreted liberally to give meaning to the charging provision. The judicial precedents on this issue do not state that machinery provisions should be interpreted liberally per se. Neither do any of the precedents cited by the Supreme Court state that legislative intent needs to be placed at the highest pedestal without weighing it against other factors such as taxpayer rights. 

Third, the Supreme Court rejected the assessee’s contention that Section 153C, IT Act, 1961 should not be interpreted to have retrospective effect since it affected the substantive rights of the third party. The Supreme Court rejected the argument on the ground that the pre-amended Section 153C was also applicable to the third party. While the Supreme Court is right, its statement does not sufficiently appreciate that the threshold to proceed against the third party after amendment to Section 153C was lowered directly affecting the rights of such party. Instead, it stressed that there was legislative intent to proceed against the third party before and after the amendment without delving into the details. Equally, the Supreme Court dismissed the argument that there is presumption against retrospectivity of a statute. The Supreme Court examined the jurisprudence on presumption against/for retrospectivity superficially. At no place in the judgment is there an examination as to why and how the amendment to Section 153C is ‘declaratory’ and why presumption against its retrospectivity is inapplicable.            

Fourth, which overlays with the second point, is that the Supreme Court laid considerable emphasis on legislative intent. Despite immense emphasis on legislative intent, the Supreme Court did not examine as to why one sub-clause of Section 153C continued to retain ‘belongs to’ after the amendment. And, neither did it refer to any source that helps us understand the original legislative intent or the intent behind amendment to Section 153C. In the absence of such references, legislative intent is a malleable phrase in the hands of any adjudicating authority, and it was used as such in the impugned case.  

Fifth, the Supreme Court stated that the Delhi High Court construed the term ‘belongs’ unduly narrowly and restrictively, but never clarified the precise objection to the High Court’s interpretive approach. Strict interpretation of tax statutes is the default approach of Courts, and deviations from it need to be justified not adherence to it. The Delhi High Court was clear in its judgment that a tax statute must be interpreted strictly and in case of doubt or dispute must be interpreted in favor of the assessee. (para 7) And the Delhi High Court adopted such an approach in construing Section 153C, IT Act, 1961. The Supreme Court never truly explained how adopting such an approach by the Delhi High was an unjust or restrictive interpretation. 

Sixth, the Supreme Court took made an interesting point when it referred to First Proviso to Section 153C. The said Proviso contains a deeming fiction where in case of a third person, the reference to the date of initiation of the search under Section 132 shall be construed as reference to the date of receiving of books of account or documents or assets seized or requisitioned by the assessing officer having jurisdiction over such person. The deeming fiction in the First Proviso moves the date of initiation of search to the date the assessing officer of the third person receives the documents. In the impugned case, while the search took place before 1.06.2015, the assessing officer of the third party received the documents on 25.04.2017 and issued notice to the third party on 04.05.2018. Thus, as per the deeming fiction, the search against the third party was initiated after 1.06.2015. Given these set of facts, it was not unreasonable to suggest that the applicable provision should have been the amended Section 153C. The Supreme Court’s used the First Proviso to support its conclusion (para 10.3) But the Supreme Court did not delve into the implication of the First Proviso adequately vis-à-vis its repeated emphasis on legislative intent. The Supreme Court observed that not allowing the Revenue Department to proceed against the third party ‘solely on the ground that the search was conducted prior to the amendment’ would frustrate the object and purpose of the amendment. In arriving at this conclusion, the Supreme Court did not satisfactorily examine how the deeming fiction in the First Proviso to Section 153C makes the actual date of initiation of search irrelevant for the third person.   

Conclusion 

The Supreme Court granting the State leeway in tax (and economic) laws is a well-entrenched doctrine in Indian tax jurisprudence. In this case, the Supreme Court used the doctrine impliedly to stamp its approval to an amendment to IT Act, 1961, stating that the amendment was retrospective in effect, without articulating its reasoning in a cogent and defensible manner. While the deeming fiction in the First Proviso to Section 153C lends some support to the Supreme Court’s conclusion, there was need for more robust reasoning to interpret the amendment to be retrospective in nature. The amendment of Section 153C has an appreciable impact on the substantive rights of the third parties. This factor alone was sufficient for the Supreme Court’s conclusion to be based on impeccable reasoning, but we only saw a glimpse of it in the judgment. 


[1] Income Tax Officer v Vikram Sujit Kumar Bhatia 2023 SCC OnLine SC 370. 

[2] Pepsico India Holdings Private Limited v ACIT 2014 SCC OnLine Del 4155. 

[3] Supreme Court, in its judgment, did not specifically state the name of parties and the exact decision. Though one of the Gujarat High Court’s decision decided in 2019 is Anikumar Gopikishan Aggarwal v CIT [2019] 106 taxmann.com 137 (Guj). In this case, the Gujarat High Court decided that amendment to Section 153C, IT Act, 1961 was prospective in nature.  

[4] Commissioner of Income Tax, III v Calcutta Knitwears, Ludhiana (2014) 6 SCC 444. 

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