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Bonafide error in making GST return through GST forms should be allowed for rectification : Bombay HC

TITLE : Star Engineers Pvt. Ltd v Union of India

CITATION : WP No 15368 of 2023

CORAM : Hon’ble justice G.S Kulkarni & Hon’ble justice Jitendra Jain

DATE:  14th  December, 2023

INTRODUCTION :

A writ was filed under Article 226 of the Constitution to challenge a communication issued by the Deputy Commissioner, State Tax whereby an application was filed by the petitioner for seeking approval to modify Form GSTR-1 for the financial year 2021-2022.

FACTS :

The petitioner is engaged in designing, developing, manufacturing and supplying wide range of electronic components for industrial purpose.  The petitioner had carried out delivery of the goods to several third party vendors and simultaneously issued invoices. The petitioner is a regular supplier of Bajaj Auto Limited (BAL). There was an error made during filing the form GSTR -1. The petitioner contends that BAL was made aware of such error and the correction was shown in GSTIN-1 form. However, the invoices submitted in favour of BAL did not appear in BAL’s form. The petitioner approached the Deputy commissioner of State Tax and requested the petitioner to rectify Form GSTR-1 to resolve the issue. The petitioner’s request was rejected.

COURT’S ANALYSIS

The court relied on Section 37, 38 and 39 of the CGST/MGST, 2017. The sections talk about furnishing details of outward, inward supplies along with details of return goods.

Section 37 talks about the returns from outward supplies of goods. Section 37(3) of the act states that if there are any error or omission in the return. Such error or omission can be rectified in the manner prescribed. Section 38 provides for the returns from inward supplies.  Section 38(3) provides that the rectification on inward supplies should be communicated to the supplier.  The section also provides for rectification of error under section 37(3).  Section 39 provides for furnishing of returns under which it is clearly provided that a return is required to be furnished electronically indicating the inward and outward supplies of goods and services or both, input tax credit availed, tax payable, tax paid or such other particulars in such form and manner, and within such time, as may be prescribed.

The court held that Section 37 cannot be interpreted in a manner that it would prevent the assessee from rectifying the mistakes.

The court held that “Any inadvertent error which had occurred in filing of the returns, once is permitted to be rectified, any technicality not making a window for such rectification, ought not to defeat the provisions of sub-section (3) of Section 37”

A bonafide, inadvertent error in furnishing details in GST return forms should be recognized and permitted to be corrected.

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Post the termination of sub lease agreement, the lessee is not meant to collect rent and add it as an income to the owner : Bombay HC

TITLE : T.V. Patel Pvt. Ltd.v The Dy. Commissioner of Income Tax

CITATION : Income Tax Appeal No.699 of 2002

CORAM : Hon’ble Justice G.S Kulkarni and Hon’ble Justice Jitendra Jain

DATE:  4th December, 2023

INTRODUCTION :

The appeals relate to the assessment year 1986-87, 1987-88, 1988-89, 1990-91, 1991-92 and 1993-94 for deciding the question of law on whether an Assessing Officer was justified in reopening the assessment under Section 148 of the Income Tax Act.

FACTS :

The appellant entered into an agreement with Bombay Builders to construct a building and sell 30 flats to the appellant. Bombay builders was substituted with IDBI through a tripartite agreement. IDBI on various accounts have failed to pay the rent and a suit was filed by the appellant. On 20th March 1989, an assessment order under section 143 read with section 148 of the Act for the assessment year 1986-87 came to be passed and the rent on account of sub-lease agreement of the Appellant with IDBI amounting to Rs.3,42,720/- was added as income of the Appellant including the other assessment years. The assessing officer held that no amount is due from IDBI as lease and rent and therefore the question of taxing does not arise.

COURT’S ANALYSIS

The court had to examine whether the sub-lease rent of Rs.3,42,720/- sought to be taxed accrues or arises to the appellant in the assessment year 1986-87. The court held that the right to receive Rs.3,42,720/- under the sub-lease agreement is not a subsisting right in favour of the Appellant which too is a subject matter of civil dispute. Further, it was held that the determination of the amount payable by the IDBI to the Appellant as prayed for by the Appellant in its suit is to be determined by the Small Causes Court. The appellant had terminated the agreement upon the return of cheques and therefore the same is not justified as an income revenue of Rs.3,42,720 to be taxed.

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Delhi High Court Dismissed the petition seeking overturn the order passed by Income Tax Appellate Tribunal

Title: THE PR. COMMISSIONER OF INCOME TAX -CENTRAL -1 vs VALLEY IRON & STEEL CO. LTD.

Date of decision: 18.07.2023

+ ITA 913/2019

CORAM: HON’BLE MR JUSTICE RAJIV SHAKDHER

     HON’BLE MR JUSTICE GIRISH KATHPALIA

Introduction

Delhi High Court Dismissed the petition seeking overturn the order passed by Income Tax Appellate Tribunal as the Assesee filed a return with nil gains and never had filed a revised return.

Facts of the case

The respondent/assessee suffered significant losses as a result of the floods in Himachal Pradesh and was forced to use the Corporate Debt Restructuring Scheme (“CDR”) to restructure the debts it had obtained from banking institutions, which were its lenders.

A working capital loan became a working capital term loan (“WCTL”) due to CDR, and the accumulated interest became a fund interest term loan (“FITL”).

The respondent/assessee filed a Return of Income (“ROI”) for the AY in question on November 30, 2014.The respondent/assessee updated the first ROI on September 1, 2016, (the online submission was submitted on August 29, 2016).The revision in the ROI was triggered by a revision in the tax audit

A disallowance under Section 43B of the Act was included in the original tax audit report, however it only amounted to Rs. 6,08,64,813/-. The disallowance was suo motu increased to Rs. 48,18,93,419 in the updated tax audit report.The AO first questioned the disallowance under Section 43B of the Act in a notification dated November 21, 2016, which was issued according to Section 142(1) of the Act. report, which was carried out on 26.08.2016. The tax audit report was revised by the Chartered Accountant of the respondent/assessee suo motu.

Analysis of the court

It is obvious that the assessee/respondent increased the disallowance according to Section 43B of the Act from Rs. 6,08,64,813/- to Rs. 48,18,93,419/- on their own initiative. This course correction was carried out with the submission of a revised tax audit report on August 26, 2016, which resulted in the filing of a corrected return both physically and electronically. On August 29, 2016, a revised ROI was submitted electronically. On September 1, 2016, a physical filing of the amended ROI was made.

The Tribunal stated that there is no disputing the fact that the AO initially raised a particular concern over the disallowance under Section 43B of the Act via a notification dated November 21, 2016, issued under Section 142(1) of the Act. Therefore, as rightly asserted by respondent it was not the case that the respondent/assessee made a course correction after the disallowance under Section 43B of the Act was incorrectly entered in the tax audit report, as observed by the AO.

Furthermore, there is no disputing the fact that the Gujarat High Court rendered decisions at the pertinent period that supported the respondent/assessee. For convenience’s sake, the order dated August 31, 2006 in Commissioner of Income Tax v. Gujarat Cypromet Ltd. appellant does not contest the fact that the Gujarat High Court’s position was only overturned by the Supreme Court on February 21, 2019, in a decision published in Commissioner of Income-tax, Ahmedabad v. Gujarat Cypromet Ltd., (2019) 103 taxmann.com 346 (SC). Given the above, it cannot be claimed that the respondent/assessee did not willingly increase the disallowance under Section 43B of the Act.

According to us, the Madras High Court decision in Gangotri Textiles Ltd. v. Deputy Commissioner of Income Tax, Corporate Circle 2, Coimbatore, (2020) 121 taxmann.com 171 (Madras), on which Appallant has relied, is distinguishable on the basis of facts.

 Reading the Madras High Court decision would reveal that the assessee hid its profits that resulted from the sale of the subject windmills and land. In reality, the assessee had submitted a return with “nil” capital gains.

The assessee never submitted a corrected return, and only after the case was brought before the Tribunal did it finally acknowledge that such a sale had indeed occurred.

The Supreme Court’s ruling in MAK Data (P) Ltd. v. Commissioner of Income-tax-II, (2013) 38 taxmann.com 448 (SC), is also notable because it involved documents such as share application forms, bank statements, and memoranda of association for corporations, among others, that were discovered during a survey carried out in accordance with Section 133A of the Act.

In our opinion, the Madras High Court’s and the Supreme Court’s rulings in the cases of Gangotri Textiles Ltd. and MAK Data (P) Ltd. were made in contexts that were distinct from the one that arose in the current case.

Thus, for the forgoing reasons, we are not inclined to interdict the decision of the Tribunal. According to us, no substantial question of law arises for our consideration. The appeal is, accordingly, closed.

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Delhi High court Dismissed the appeal against the order of the Income Tax Appellate Tribunal

Title: THE COMMISSIONER OF INCOME TAX – INTERNATIONAL TAXATION -3 vs SPRINGER NATURE CUSTOMER SERVICES CENTRE GMBH (EARLIER KNOWN AS SPRINGER CUSTOMERS CENTRE GMBH)

Judgment Reserved on: 25.05.2023  

Judgment Pronounced on: 12.07.2023

+ ITA 306/2023

CORAM: HON’BLE MR JUSTICE RAJIV SHAKDHER

   HON’BLE MR JUSTICE GIRISH KATHPALIA

Introduction

Delhi High court Dismissed the appeal against the order of the Income Tax Appellate Tribunal concerning Assessment Year (AY) 2013-14. Via the impugned order, the Tribunal has partly allowed the appeal preferred by the respondent/assessee.

Facts of the case

On March 31, 2015, the respondent/assessee submitted its return of income (ROI) for the pertinent AY, which was 2013–2014. The respondent/assessee originally processed its declaration of “nil” income under Section 143(1) of the Income Tax Act of 1961 through the aforementioned ROI. However, the ROI was chosen for examination, and as a result, the respondent/assessee was served with a notice dated 20.08.2015 issued under Section 143(2) of the Act. Three increases to the respondent’s income were made by the Assessing Officer (AO) through order dated 04.05.2016, which was issued in accordance with Section 143(3) read with Section 144C(3)(a) of the Act.

The first addition dealt with a sum equal to Rs. 24,84,114 being paid to the respondent/assessee by Springer India Pvt. Ltd. (also known as “SIPL”) in India in accordance with a Commissionaire Agreement. This addition was made up of two parts. The second increase, which the AO made, was for Rs. 16,67,83,110. This sum reflected the subscription costs the respondent/assessee had paid to two Indian companies, Informatics Publishing Private Ltd. and ZS Associates, for e-journals. The third increment amounts to Rs. 2,62,85,504 in total. On behalf of SIPL, the respondent/assessee collected this sum from Indian-based third parties whose consumers were purchasing online journals and/or books. The aforementioned sum is listed as “gross proceeds from sale by AE (Associate Enterprise) of Indian journal in printed form” in SIPL’s Form 3CEB report.

The AO saw the aforementioned three additions as royalties, and to that end, it made use of Section 9(1)(vi) of the Act and Article 12 of the Double Taxation Avoidance Agreement between Germany and India (often known as the “DTAA”). The respondent/assessee opted to file an appeal with the Commissioner of Income Tax (Appeals) (abbreviated “CIT(A)”) because it was unhappy with the changes that had been made. In a ruling dated 22.01.2019, the CIT(A) partially upheld the appeal. The second part of the initial addition, which was equal to Rs. 1,94,279 and had been labelled as “service charges” for the sale of “Indian journals in printed form,” was eliminated by the CIT(A). Insofar as the second and third additions were concerned, the CIT(A) confirmed the same, i.e., both with regard to the amount, as well as the treatment accorded to them by the AO. In other words, these amounts were treated as royalty, by the CIT(A) as well.

It is this decision which led to the respondent/assessee preferring an appeal with the Tribunal. As mentioned above, the CIT(A) affirmed the deletion of the first component of the first addition by the Tribunal in the assailed order dated 14.10.2022. The Tribunal cited a ruling issued by its coordination bench in the case of Springer Verlag GmbH v. DCIT in ITA Nos. 434 and 3826/DEL/2019, which was rendered on August 23,2022. The AYs 2014–15 and 2015–16 were covered by the Tribunal’s ruling.

Regarding the second addition, the Tribunal overruled the respondent/assessee’s argument, which claimed that the subscription fee could not be considered a kind of royalty. Regarding this matter, the Tribunal adhered to the ruling made by the Supreme Court in Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT, [2021] 432 ITR 471 (SC).

Analysis of the court

In this case, the Tribunal disagreed with the CIT(A)’s conclusion. There was Rs. 22,89,835 at stake. The services provided by the respondent/assessee must unquestionably come within one or more of the following categories, namely managerial, technical, or consulting services, in order for this addition to be upheld as FTS. This is clear from a straightforward reading of Section 9(1)(vii)(b) of the Act, read with Explanation 2, and Article 12(4) of the DTAA.

Section 9 establishes a deeming fiction for income accruing or generating in India, which includes, among other things, FTS paid by a resident. Explanation 2 to the aforementioned provision defines FTS as any payment (including lump sum payments) for the provision of managerial, technical, or consulting services. Payments for the recipient’s own construction, assembly, mining, or similar projects are not considered to be FTS, nor are payments that would otherwise be considered compensation subject to taxation under the “salaries” heading.

As a result, the services provided by the respondent/assessee under the Commissionaire Agreement must fall under one or more of the aforementioned categories, namely management, technical, or consultant services, in order for the consideration received to be considered FTS. The respondent/assessee received a commission for providing the services at a rate of 9.9% on the net revenue total of “any and all” sales commissioned through the respondent/assessee’s intermediary. The assessor/respondent was authorised to keep the commission while transferring the revenue to SIPL or by any other commission payment arranged between SIPL and itself.

Nothing in the Commissionaire Agreement suggests that the respondent/assessee was required to identify, create, define, or evaluate the goals that SIPL needed to achieve, or even to frame the policies that led to these goals, supervise, carry out, or modify already-adopted policies. In a sense, the respondent/assessee was not carrying out executive or supervisory duties. The respondent/assessee was only required to provide assistance with company operations.

We do not feel motivated to challenge the Tribunal’s judgement on the removal of the added item in the sum of Rs. 22,89,835, on account of commission that the respondent/assessee got. We believe that the CIT(A) erred in concluding that the respondent/assessee’s receipt of the aforementioned sum possessed FTS characteristics.

The coordination bench judgement of this Court in DIT v. Panalfa Autoelektrik Ltd. addressed the characteristics of what constituted FTS in great detail. The coordination bench has addressed the order issued by the Authority for Advance Ruling (AAR) in Wallace Pharmaceuticals (P.) Ltd. in this ruling. Mr. Bhatia’s attempt to separate the ruling in DIT v. Panalfa Autoelektrik Ltd. must fail because it misinterprets the judgment’s real ratio.

The second addition is therefore brought into focus. We must note that Mr. Bhatia stated during the argument that the additional Rs. 16,67,83,110/- that the respondent/assessee received from its affiliates as a subscription fee for e-journals could not be considered a royalty due to the ruling made by the Supreme Court in Engineering Analysis. The idea that the subscription fee should be classified as FTS or, alternatively, as royalty has been raised for the first time in the written submissions, in contrast to the submission.

According to us, the argument that a subscription fee should be classified as FTS cannot be recognised because the appellant and revenue did not take this stance before the Tribunal. This flip-flop was made by respondent/assessee would do well to abjure. 

Considering that there is no evidence on file indicating that the respondent/assessee has granted the right in respect of copyright to the relevant subscribers of the e-journals, we also believe that the subscription fee cannot be classified as royalty. The only thing the respondent/assessee did was sell the publication that was protected by a copyright to the relevant organisations without granting any copyright to the content in question.

Given the ruling issued by the Supreme Court in the instance of Engineering Analysis, we believe the Tribunal acted correctly when it erased the addition made under this heading. For the aforementioned causes, we believe that there isn’t a significant legal issue that warrants our examination. The judgements mentioned above address the problems that were presented.

 As a result, the appeal is dismissed.

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Secured Creditors and the Rainbow Impact on IBC

Abstract

This article is based on the decision given by the hon’ble supreme court on STATE TAX OFFICER ( 1 ) VERSUS RAINBOW PAPERS LIMITED LNIND 2022 SC 596  and it will further dissect the legal question raised in this case along with the previous precedents of the hon’ble SC in similar cases.

The Verdict in this case basically held that the resolution plan proposed by the Committee of Creditors (COC) wouldn’t pass the scrutiny of law if the debtor fails to pay off the tax dues owed by him to the relevant tax authority, in such a case the Debtor is bound to liquidate its assets under section 53 of the IBC.

It goes without saying that the aforementioned judgement has raised worries within the insolvency sector, and as a result, the stakeholders have been considering what has to be done in order to comply with the aforementioned ruling.

Introduction

The controversy brought up in the judgement was outstanding taxes under the Gujarat Value Added Tax Act of 2003 (the “GVAT”) and how they conflicted with the waterfall system under Section 53 of the IBC. The waterfall mechanism, which is covered by Section 53 of the IBC, was only implemented as a legal tool to establish a hierarchy for prioritising the payment of obligations at the time of the corporate debtor’s liquidation. In essence, the dispute in the case is around outstanding claims from governmental bodies and privately secured debts. It is essential to review the ruling at this time and comprehend how it affects the IBC’s goal. Section 48 of the Gujarat Value Added Tax Act, 2003 (“GVAT Act”), according to the Supreme Court (“SC”), is not in conflict with or in contravention of Section 53 of the Insolvency and Bankruptcy Code, 2016 (“the Code”).

Analysis of the Court

In reaching the aforementioned conclusion, the Court made an important ruling by concluding that because the State Government has first charge over the property and is considered a “secured creditor” under the Gujarat Value Added Tax, 1974, it will also be treated as such under Section 53 (1) (b) (ii) of the IBC for liquidation purposes.

The State’s claim has been ruled to be untimely by the adjudicating authority (NCLT) and the appellate authority (NCLAT). Regulation 12 of the 2016 Regulations addresses the deadline for submitting a claim and supporting documentation, which is outlined in the public notification made according to Section 15 of the IBC. However, the time period is merely a guide and not required.

It also observed in the case of Vishal Saxena & Anr. v. Swami Deen Gupta where NCLT held that the time limit under Regulation 12 for submitting a claim is directory and not necessary in the matter of Resolution Professional. In its ruling and decision of June 10, 2021 in Assistant Commissioner of Customs v. Mathur Sabhapathy Vishwanathan, the NCLT adopted a similar stance. Thus, State’s claim cannot be rejected without violating the law.

The Adjudicating Authority may only approve the Resolution Plan, as approved by the Committee of Creditors (CoC), if the Adjudicating Authority is satisfied that the Resolution Plan complies with Section 30(2) of the IBC. This is made clear by Section 31 of the IBC, which governs the approval of a Resolution Plan by the Adjudicating Authority. The Resolution Plan cannot be authorised if it does not adhere to Section 30(2)’s standards.

The hon’ble court also took note of, Ghanshyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.,

“A simple reading of Section 31 of the I&B Code would also make it abundantly clear that the corporate debtor, as well as its employees, members, creditors, guarantors, and other stakeholders, are bound by the resolution plan once it has been approved by the adjudicating authority and it has determined that the resolution plan as approved by CoC satisfies the requirements referred to in Subsection (2) of Section 30. Such a clause is necessary since one of the main goals of the I&B Code is to revive the corporate debtor and turn it into an operating business.”[1]

“The resolution plan submitted by the successful resolution applicant must include a number of provisions, including a payment provision for the costs of the insolvency resolution process and a payment provision for operational creditors’ debts, which must not be less than the amount that would be paid to those creditors in the event that the corporate debtor was liquidated in accordance with Section 53, or the amount that would have been paid had the amount to be distributed under that section been less. The resolution plan must also include provisions for paying the obligations of financial creditors who reject the resolution plan, which also must not be less than the sum paid to those creditors in accordance with Section 53, subsection (1), in the event that the corporate debtor is liquidated. To dispel confusion, Explanation 1 to Clause (b) of Subsection (2) of Section 30 of the I&B Code specifies that a distribution made in line with the terms of the aforementioned clause must be just and equitable to such creditors. The resolution plan must also include provisions for the administration of the corporate debtor’s affairs following approval, as well as for the execution and oversight of the resolution plan, Clause a(e) of sub-section (2) of Section 30 of the I&B Code also casts a duty on RP to examine that the resolution plan does not contravene any of the provisions of the law for the time being in force.”[2]

A resolution plan approved by the Committee of Creditors in accordance with Subsection (4) of Section 30 of the IBC may, under Section 31 of the IBC, only be approved by the Adjudicating Authority if the Adjudicating Authority is satisfied that the resolution plan meets the conditions outlined in Subsection (2) of Section 30 of the IBC. The fulfilment of Sub-Section (2) of Section 30 of the IBC criteria is a prerequisite for the approval of a resolution plan.

The Central Government, any State Government, any statutory or other authority, any financial creditor, or any other creditor to whom a debt in respect of dues arising under any law currently in effect is owed would be bound by a resolution plan that is valid and complies with Sub-Section (2) of Section 30 of the IBC. When there are still unpaid statutory obligations owed by a corporate debtor, such a resolution plan would not be binding on the State.

It also held that a company must be liquidated and its assets sold and distributed in accordance with Section 53 of the IBC if it is unable to pay its debts, which should include any statutory obligations to the government and/or other authorities, and there is no plan that envisages dissipation of those debts in a phased manner, uniform proportional reduction.

In the opinion of the court, the Committee of Creditors—which may include financial institutions and other financial creditors—cannot secure its own obligations at the expense of any other obligations, including statutory obligations to any government or governmental authority. Section 48 of the GVAT Act is not in conflict with Section 53 of the IBC or any other IBC requirements. According to Section 53(1)(b)(ii), debts payable to a secured creditor—which, under the GVAT Act, would include the State—rank equally with other specified obligations, including debts related to workman’s compensation for the 24 months prior to the liquidation beginning date. the GVAT Act designates the State as a secured creditor. A creditor to whom a security interest is credited is referred to as a secured creditor in Section 3(30) of the IBC. Such a security interest might be established legally. Any government or governmental authority is not excluded from the IBC’s definition of secured creditor.

Thus, the Court allowed the appeal of the appellant and set aside the order of the tribunal.

Claims Countering the verdict

The legal position is quite poles apart from this verdict, as the apex court had already stated in its verdict in “PR Commissioner of Income Tax v. Monnet Ispat and Energy Limited”, where it categorically held that “IBC has overriding effect on the every existing law inconsistent to it including the Income tax law. Further, the Apex Court also took a note that because Income Tax debts are in the nature of Crown Debts, they do not take precedence even over secured creditors who are private individuals, citing the case of Dena Bank vs. Bhikhabhai Prabhudas Parekh and Co., reported in 2000 (5) SCC 694 [LNIND 2000 SC 721].”[3]

The Bombay High Court recently held that secured debt shall take priority over “Government” dues/tax dues in the case of M/s Edelweiss Asset Reconstruction v. M/s Tax Recovery Officer, 5 dated July 28, 2021. The court based this decision on the fact that the Income Tax Act makes no reference to the obligations of the Income Tax Department taking precedence over secured debt. The Revenue was not permitted to impede the petitioner’s rights as a secured creditor. The order for attachment was invalid.

The tax dues, being an input to the Consolidated Fund of India and of the States, clearly come within the ambit of section 53(1)(e) of the Code. If the Legislature, in its wisdom, assigned the fifth position in the order of priority to such dues, it is not for this Court to delve into or belittle the rationale underlying the same”[4]

A secured creditor often falls under the category of financial creditors. However, there may be circumstances in which even an operating debtor qualifies as a “secured creditor.” For instance, the National Company Law Appellate Tribunal recognised an operational creditor as a secured creditor in the Concast Steel & Power Ltd. v. MSTC Limited case because of a pledge agreement that had been made with the corporate debtor.

Conclusion

Thus it is advised that the Supreme Court must review the current ruling and clarify the law in light of this. It is obvious that if the existing legal situation is allowed to continue, it would harm the goal that the Code is meant to accomplish. As a result, the added responsibility of paying current or potential government and legislative dues is likely to deter any prospective resolution application. In the end, it could lead to fewer settlement requests, lower asset valuations, and higher haircuts for creditors.

[1] Para 65 Ghanshyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.

[2] Para 66 Ghanshyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.

[3] Para 4, PR Commissioner of Income Tax v. Monnet Ispat and Energy Limited

[4] Leo Edibles & Fats Limited v. Tax Recovery Officer, Writ Petition No. 8560 of 2018.

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