Kuehne Plus Nagel Private Limited vs. Union of India [S.C.A.. No. 13427 of 2024]

Background of the Case

The Appellant, Kuehne Plus Nagel Pvt. Ltd., a company engaged in international and domestic freight forwarding, warehousing, and logistics services, filed a refund claim of Rs. 1,82,99,406 for the period from April to June 2021 towards unutilized Input Tax Credit (ITC) accumulated on export of services. The appellant operates under a globally recognized clearing mechanism approved by the Reserve Bank of India (RBI), wherein foreign currency receivables from group entities abroad are netted off against payables to them, and only the net amount is remitted to India. This arrangement is in place since 1997 and has explicit RBI approvals. The appellant duly filed the refund application on the GST portal along with all necessary supporting documents, including Chartered Accountant certificates, reconciliation statements, and bank confirmations.

Although the refund was acknowledged and additional documents were submitted on request, the application was rejected by the adjudicating authority on the sole ground of non-submission of FIRCs for each export invoice, a decision which was later upheld by the appellate authority despite the appellant’s repeated explanations and additional evidence.

Arguments by the Appellant

The appellant contended that it had complied with all the substantive conditions for refund under the GST law and that the authorities had erroneously rejected the claim purely on technical grounds. It was submitted that the requirement to submit FIRCs was not feasible under the RBI-approved net-off mechanism, as only consolidated inward remittances are reflected in the bank’s advice and EEFC account. The appellant provided Chartered Accountant certificates certifying the quantum of foreign exchange received, supported by monthly reconciliation and a certificate from Standard Chartered Bank confirming the remittances received. It was argued that such documentary evidence, especially when the fact of export and receipt of convertible foreign exchange is not disputed, should be considered sufficient compliance.

The appellant also pointed out that no deficiency memo was ever issued, and the refund was denied solely based on an inflexible reading of procedural requirements under Rule 89(2)(c) and Circular No. 125/44/2019, despite fulfilling all the substantive requirements for refund.

Respondent’s Response

The respondents, defended the rejection on the ground that Rule 89(2)(c) of the CGST Rules explicitly requires the submission of FIRCs as evidence of receipt of foreign exchange. They contended that the alternative documents provided by the appellant, such as Chartered Accountant certificates or bank confirmations, could not replace the mandated FIRCs for each export invoice. The department emphasized that the requirement was not merely procedural but integral to verifying the legitimacy of the refund claim.

They also argued that Circular No. 125/44/2019 issued by the CBIC provides binding instructions that necessitate adherence to specified documentation, and that deviation from such circulars would undermine the uniform implementation of refund provisions. As the FIRCs were not provided, they maintained that the refund claim was rightly rejected both at the adjudicating and appellate levels.

Court Findings and Decision

The Gujarat High Court held that the rejection of the refund claim was unjustified, as the appellant had fulfilled the substantial conditions under the GST law. The Court observed that when the fact of export and receipt of convertible foreign exchange is undisputed, the authorities should not insist on rigid procedural compliance, especially when valid alternative evidence is placed on record. The Court emphasized that FIRCs are not the only acceptable mode of proof, particularly in cases where the RBI permits a net-off mechanism for foreign exchange remittance. It noted that the appellant had submitted credible documentation including bank certificates and CA-authenticated reconciliation, which sufficiently demonstrated the realization of export proceeds.

The Court ruled that procedural lapses cannot override substantive compliance and quashed both the adjudicating and appellate orders. Consequently, it directed the department to process and grant the refund of Rs. 1,82,99,406 along with applicable interest to the appellant.

Gujarat HC Export Refund FIRCs Ruling

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Nayanaben Hasmukhbhai Patel & Ors. vs. Revenue [Special Civil Application No.14635 of 2024]

Background of the Case

A search and seizure operation conducted by the Income Tax Department at the premises of petitioner no. 3, Anandkumar Hasmukhbhai Patel. During the proceedings, jewellery worth Rs. 77.82 lakh was discovered, of which Rs. 42.86 lakh was accepted under CBDT Instruction No.1916 as belonging to his family members and not seized. However, the remaining jewellery worth Rs. 34.96 lakh along with Rs. 7 lakh in cash was seized under Section 132 of the Income Tax Act. Subsequently, the jewellery was subjected to scrutiny during the assessment for AY 2014–15. Though a partial relief of ₹15 lakh was granted, the Assessing Officer added Rs. 19.96 lakh to the taxable income of petitioner no. 3.

This addition was later deleted in full by the CIT(A) on 02.04.2019, a decision that reached finality as no appeal was filed by the department. Despite this, the Income Tax Department did not release the entire seized jewellery, prompting the petitioners to approach the Gujarat High Court under Article 226 of the Constitution.

Arguments by the Appellant

The appellant argued that once the addition had been deleted by the CIT(A), and the penalty amount under Section 271(1)(c) had been duly paid, there remained no outstanding tax liability for AY 2014–15. They contended that the Department’s continued retention of jewellery worth Rs. 16.33 lakh, especially after releasing a portion worth Rs. 18.63 lakh to petitioner no.1, was unjustified. It was also emphasized that the jewellery in question was not owned by petitioner no.3, but by his wife and mother, as evidenced by a joint affidavit submitted on 07.11.2024.

The petitioners invoked Section 132B of the Income Tax Act, asserting that the seized assets could only be retained against liabilities pertaining to the relevant assessment year, and not for future demands. Relying on both statutory provisions and precedents, they pleaded for the immediate release of the remaining seized jewellery and sought interest compensation for the undue retention.

Respondent’s Response

The respondent, Revenue argued that a substantial outstanding demand of Rs. 3.36 crore existed against petitioner no.3 for subsequent assessment years, and that the remaining jewellery was being rightfully retained to safeguard recovery of these dues. The Department took the stand that despite the relief granted for AY 2014–15, the assets were lawfully being adjusted against the petitioner’s overall liability. Thus, they sought validation of the order dated 12.11.2024, through which the partial release of jewellery had been made, while the remainder was retained as security for future recoveries.

Court Findings and Decision

The Gujarat High Court held that the Income Tax Department could not retain jewellery seized for one assessment year against liabilities arising from other assessment years, especially when the assessment in question had concluded without any outstanding demand. The Court noted that the CIT(A)’s order had attained finality and that there was no pending liability for AY 2014–15. Furthermore, the department’s reliance on general instructions could not override the specific statutory limitations of Section 132B as it stood at the relevant time. The Court directed the respondents to release the remaining jewellery and dismissed the justification for withholding the same against unrelated tax dues.

To download official order, Click Here

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Shree Sarkhej Kelwani Mandal vs. Revenue [Special Civil Application No. 6003 of 2021]

Background of the Case

The appellant had filed its return for the Assessment Year 2018-19, declaring nil income while claiming exemption based on its charitable activities. Along with the return, the trust submitted an audit report in Form 10B, as required under Section 12A(b) of the Act. However, due to an inadvertent error by the Chartered Accountant, certain financial figures were incorrectly reported in the audit report. A revised audit report was filed, correcting the discrepancies. Despite this, the Income Tax Department processed the original return under Section 143(1) and issued an intimation order, denying the exemption.

Subsequently, the case was selected for scrutiny assessment, and a notice under Section 143(2) was issued. The appellant responded by explaining the reasons for the revised audit report. However, the Assessing Officer issued a show-cause notice on 27th February 2021, proposing an addition of Rs. 4.75 crore by denying exemption benefits. The appellant sought an adjournment to file a detailed response, requesting time until 11th March 2021. However, the Assessing Officer ignored this request and passed the final assessment order on 4th March 2021, confirming the proposed addition. Aggrieved by this violation of natural justice, the appellant approached the Gujarat High Court.

Arguments by the Appellant

The appellant vehemently argued that the denial of exemption and the hasty passing of the assessment order were arbitrary and illegal. The AO violated principles of natural justice by refusing to grant reasonable time to respond to the SCN. The appellant argued that the revised audit report had already rectified the initial clerical errors, and the Department’s refusal to consider it was contrary to the scheme of the Income Tax Act. It was also submitted that the penalty order passed during the pendency of the High Court’s stay demonstrated willful disregard for judicial authority, amounting to contempt of court.

Furthermore, the appellant also highlighted systemic failures in the Income Tax Department, including defective software that failed to reflect adjournment requests and non-compliance with court orders.

Respondent’s Response

The respondent, Revenue initially defended the assessment order, asserting that the appellant had failed to comply with procedural requirements under the Income Tax Act. It was argued that the revised audit report was filed belatedly, and hence, the denial of exemption was justified.

The Department acknowledged lapses in its handling of the case. It admitted that the Assessing Officer had overlooked the adjournment request due to technical glitches in the e-filing portal, which failed to synchronize the request with the case records. The Department also tendered an unconditional apology for the penalty order passed in violation of the High Court’s stay, stating that it was an unintentional oversight.

Court Findings and Decision

The Gujarat High Court, held that the assessment order was passed in blatant violation of natural justice, as the appellant was denied a reasonable opportunity to present its case. The judges observed that three days’ time to respond to a complex tax demand was grossly inadequate, and the Assessing Officer’s refusal to grant an adjournment was arbitrary. Regarding the penalty order, the court strongly condemned the Department for flouting the interim stay, terming it a serious contempt of judicial authority. The penalty order was quashed outright, and the court directed the Department to ensure strict compliance with judicial orders in the future.

To download official order, Click Here

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Amitkumar Chandulal Rajani vs. Revenue (Special Civil Application No. 2930 of 2022)

Background of the Case

The Appellant, Amitkumar Chandulal Rajani (Proprietor of S.R. Jewellers), had duly filed his ITR for AY 2013–14 to 2015–16 under section 139(1) of the Act. However, the ITD issued reassessment notices under Section 148 on 30^th March 2021, alleging that the petitioner had undisclosed income based on information from a search action conducted on M/s. National Shroff & Co. in 2014, where unaccounted cash of Rs. 1.14 crore was found. The department claimed that the appellant had engaged in unexplained transactions leading to escaped assessment.

Appellant Arguments

The Appellant, argued that the reasons recorded failed to establish a nexus between the alleged transactions and escaped income. The AO merely parroted information from the search action without independent verification or providing documents (e.g., seized records, statements) to the appellant. Further, the appellant contested that the approval under Section 151 (for reopening beyond 4 years) was granted without application of mind. The AO wrongly claimed the appellant did not file returns for AY 2013–14 and 2014–15, despite submitting proof of filed returns.

Respondent’s Response

The Respondent, Revenue defended its position, stating that the AO had sufficient basis to reopen assessments based on search findings indicating undisclosed transactions. The revenue further refused to share search documents, claiming they were departmental secrets. Further the revenue contested that the appellant’s transactions with searched entity warranted reassessment hence establish a nexus between the alleged transactions and escaped income.

Court Findings and Decision

The Gujarat High Court ruled in favour of the appellant, held that – The AO mechanically reproduced search details without verifying their relevance to the appellant. The department failed to provide any material (e.g., seized documents, bank entries) linking the appellant to the alleged transactions. Further, approval under Section 151 was rubber-stamped without examining the merits. Also denying the appellant access to incriminating material vitiated the proceedings.

Gujarat HC Quashes Reassessment Notice

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#IncomeTax #Reassessment #Closenexus  #caselaws #GujaratHighCourt #Section148 #AmitkumarChandulalRajan #151

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Aalidhra Texcraft Engineers vs. Revenue [Special Civil Application No. 14554 of 2024]

Background of the Case

The appellant, M/s Aalidhra Texcraft Engineers, a textile machinery manufacturer registered under GST, inadvertently paid Rs. 40 lakhs in November 2020 through Form DRC-03, believing it to be excess Input Tax Credit (ITC) claimed due to a system mismatch in GSTR-2A and GSTR-3B returns. The payment was voluntary, with no tax demand from authorities. In March 2024, during a departmental scrutiny, it was confirmed that no such liability existed, prompting the appellant to file a refund claim. However, the GST authorities rejected the claim, citing the two-year limitation under Section 54(1) of the CGST Act, 2017.

Arguments by the Appellant

The appellant contended that the payment was a voluntary deposit under mistake, not a tax liability, and thus outside Section 54(1)’s limitation. Further the department’s own audit (via Form GST ASMT-10) confirmed that the payment was erroneous, making the refund a matter of natural justice. The appellant also relied on precedents (Joshi Technologies and Gujarat State Police Housing Corporation) where courts held that voluntary deposits mistakenly made are refundable without time limits.

Respondent’s Response

The respondent, Revenue argued that the refund claim (filed in March 2024) was time-barred as it exceeded two years from the payment date (November 2020). Further stated that Section 54(1) and Explanation 2(h) mandate that refunds must be claimed within two years of payment, irrespective of the nature of deposit. The appellant’s delay was inexcusable, as the mistake could have been discovered earlier through reconciliation.

Court Findings and Decision

The Gujarat High Court, ruled in favor of the appellant, holding that Voluntary payments mistaken as tax are not governed by Section 54(1). The two-year limit applies only to tax refunds, not deposits made erroneously. Further held that retention of mistakenly paid amounts violates Article 265 of the Constitution, which prohibits tax collection without legal authority.

The court directed the department to refund Rs. 40 lakhs within 12 weeks, though denied interest since the payment was the appellant’s own mistake.

Gujarat High Court GST Refund

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M/s Sahil Total Infratech Pvt. Ltd vs. ACIT [ R/Special Civil Application 20804 of 2022]

Background of the Case

The Appellant, M/s Sahil Total Infratech Pvt. Ltd., had filed an application under the Direct Tax Vivad Se Vishwas Act, 2020 (DTVSV Act), seeking to settle a tax dispute. The designated authority approved the application, and an order was passed on 12 May 2022, directing a refund of Rs. 2.20 crore to the appellant. However, the refund was not processed promptly, leading to a delay of nearly 20 months.

Arguments by the Appellant

The appellant argued that it was entitled to interest on the delayed refund under the principles of natural justice and the Supreme Court’s ruling in Union of India v. Tata Chemicals Ltd. The appellant contended that the department’s retention of the refund amount for 20 months without valid reasons warranted compensation.

The appellant submitted that it had raised multiple grievances on the Income Tax portal and followed up with the department, but the refund was not processed until the court’s intervention.

Respondent’s Response

The respondent, IT department contended that the DTVSV Act does not provide for interest on refunds. It argued that the appellant was not entitled to interest under Section 244A of the Income Tax Act since the refund arose from the DTVSV scheme. The department claimed that the delay was caused by the appellant’s failure to validate its new bank account promptly.

It argued that the refund could not be processed until the account was validated. The department denied any negligence on its part and argued that it had followed due process in handling the refund.  

Court Findings and Decision

The Gujarat High Court ruled in favor of the appellant, holding that the department was liable to pay interest on the delayed refund. The court held that the appellant was entitled to interest at 6% per annum for the period of 20 months amounted to Rs. 22.04 lakh. The court noted that the appellant had taken all necessary steps to validate the new bank account and had raised multiple grievances on the Income Tax portal. The delay was primarily due to the department’s failure to process the refund promptly.

The court relied on the Supreme Court’s decision in Union of India v. Tata Chemicals Ltd., which held that interest on delayed refunds is a form of compensation for the unauthorized retention of money by the government.

Gujarat High Court Orders Interest on Delayed Tax Refund

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Gujarat Chamber of Commerce and Industry & Ors. Vs Union of India & Ors.[R/Special Civil Application No. 11345 of 2023]

The Gujarat High Court recently delivered a landmark judgment regarding the applicability of Goods and Services Tax (GST) on the assignment of leasehold rights for industrial plots allocated by the Gujarat Industrial Development Corporation (GIDC).

The case arose from multiple civil applications filed by the Gujarat Chamber of Commerce and Industry, challenging the tax authorities’ attempts to impose an 18% GST on transactions involving the assignment of long-term leasehold rights.

GIDC, established under the Gujarat Industrial Development Act of 1962, plays a crucial role in developing industrial estates by acquiring land and creating essential infrastructure for industries.

In the leasing process, GIDC acquires and develops land, executes a licensing agreement with potential allottees, and creates a 99-year lease deed that permits assignees to transfer lease, the tax authorities began issuing summons and show-cause notices to industrial plot holders alleging that the assignment of leasehold rights should be treated as a supply of services under GST, leading to the demand of an 18% tax on such transactions. The Gujarat Chamber of Commerce and Industry contested these notices, arguing that such transfers should not attract GST or, at the very least, that input tax credit should be allowed.

In its judgment, the Gujarat High Court carefully examined several key definitions under the GST Act, which are crucial for determining the applicability of GST to the assignment of leasehold rights.

“Business” – Defined under Section 2(17) of the CGST Act, 2017, as any trade, commerce, manufacturing, or professional activities, along with activities connected to or incidental to business. It includes transactions that occur with a certain level of volume, frequency, or continuity, as well as the supply or acquisition of goods and services related to the commencement or closure of business operations.

“Goods” – According to Section 2(52) of the CGST Act, 2017, goods are defined as every kind of movable property, except for money and securities. This definition includes actionable claims, growing crops, and things that are attached to land but are agreed to be severed.

“Services” – As per Section 2(102) of the CGST Act, 2017, services are anything other than goods, money, and securities. This includes activities related to money, its use, or its conversion.

“Scope of Supply” – Section 7(1) of the CGST Act defines the scope of supply, which includes all forms of supply of goods or services. For a transaction to be taxable under GST, it must be made for consideration and conducted in the course or furtherance of business. This provision covers various forms of supply, such as sale, transfer, barter, exchange, license, rental, lease, or disposal.

These definitions were crucial for the court’s analysis to determine whether the assignment of leasehold rights constitutes a “supply” under the GST framework. Based on these definitions, the court examined whether transferring leasehold rights amounted to a supply of goods or services, concluding that it should be treated as a transfer of immovable property and therefore exempt from GST.

The judgment noted that the term “immovable property” is not explicitly defined under the CGST Act, but it is understood from other legal frameworks to include rights that come with land or buildings.

The court further explained that in the case of leasehold rights, the title to the plot remains with GIDC, and the transfer of leasehold rights essentially involves divesting the assignor of all rights in the property, including possession and usage rights. The court also noted that under previous service tax laws, even development rights (which are benefits arising from land) were not taxed, and leasehold rights could be viewed as a greater right and interest in land than development rights.

Based on this analysis, the Gujarat High Court ruled that the assignment of leasehold rights is not liable to GST. The court concluded that such transactions should not be treated as a supply of services under the GST Act, and therefore, GST should not be applied.

While this decision provides temporary clarity and will likely influence similar legal issues across India, the High Court’s analysis of GST’s applicability in property-related transactions could lead to further refinements in the legislation. Ultimately, a final and definitive ruling from the Supreme Court may be required to conclusively resolve this matter and provide long-term certainty in the tax treatment of leasehold rights.

To download full order, click here.

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