Query 1

Entitlement to issue ‘C’ form

The assessee is in the activity of manufacturing goods which are covered by GST Act. However, it has to use High Speed Diesel (HSD) in its manufacturing activity. Whether the assessee can issue ‘C’ form for purchase of HSD?

Whether he will be liable to penalty in future on ground that use of goods purchased in manufacture of goods not covered by CST Act?

Reply: The issue involved centres round the eligibility to issue ‘C’ form when the resultant goods are not covered by CST Act.

As per section 8 of CST Act, the assessee is entitled to purchase goods against ‘C’ form, if the said purchases are covered for specified use. The relevant provisions are in section 8 of CST Act.

As per said provision the purchases can be effected against ‘C’ form if such purchases are for use in manufacture of goods for sale.

The definition of ‘goods’ in CST Act is amended from 1-7-2017 so as to exclude all goods from scope of CST Act, except certain items which includes petroleum products. The situation is arising that the purchase will fall under CST Act but the goods which will be manufactured by use of such goods will fall outside scope of CST Act.

The two issues arise under above circumstances:-

(i) Whether ‘C’ form can be used when the goods manufactured do not fall under CST Act, but under GST Act and,

(ii) Whether any penalty can be attracted for wrong use?

Hon. Supreme Court has dealt with the said issue in case of Carpo Power Ltd. read along with Punjab & Haryana High Court judgment in case of Carpo Power Ltd. reported in (53 GSTR 24).

It is held that keeping into account the intention of legislature, the ‘C’ form can be allowed to be used though manufactured goods do not fall under CST but under GST Act.

Hon. Madras High Court had also an occasion to deal with said issue in case of Ramco Cements Ltd. v. C. C. T (64 GSTR 374)(Mad). Hon. High Court has elaborately dealt with issue and observed as under:

“13. Heard both sides and perused the materials placed before this Court.

  1. These writ petitions are filed by individual writ petitioners, who are engaged in any one of the following activities, viz.,

    1. Mining of limestone and manufacturing of cement.

    2. Mining and manufacture of blue metal.

    3. Manufacture of steel structural such as heavy beams and channels.

    4. Manufacture of cotton yarn and textiles.

    5. Manufacture of fertilizers and pesticides

    6. Buying and selling of lubricants, sulphur furnace and high speed diesel oil and petrol.

    7. Production of broiler chicks, poultry feed and broiler chicken…

    8. Manufacture of steel valve casting products.

    9. Manufacture of ready mixed concrete products and sale of sand and jalli.

    10. Manufacture of cement including white cement and their substitutes and concrete mixture.

  2. While such of those petitioners, who are engaged in mining activities by purchasing petroleum product like HSD for the use of such mining activity, the other petitioners, who are engaged in the other activities, as stated supra, are purchasing petroleum product like HSD for captive power generation of electricity for doing activity/manufacturing process.

  3. All these writ petitioners are commonly aggrieved against the action of the respondents in denying permission to download and issue ‘C’ declaration forms for purchase of petroleum products at concessional rate of 2%, as has been permitted in the past and till the issuance of the impugned circular. These writ petitioners, by issuing such ‘C’ declaration forms, purchased petroleum products by interstate trade as contemplated and permitted under Section 8(3)(CST Act, 1956. All these writ petitioners are registered dealers with the respective office of the respondents and there is no dispute to the fact that they are holding a valid Certificate of Registration issued by the respondents under the CST Act, 1956. It is also not in dispute that the said Certificate of Registration entitles the petitioners to purchase petroleum products at concessional rate of tax against ‘C’ declaration forms for use of the said petroleum product in their manufacturing activities. It is also not the case of the respondents that the Certificate of Registration issued to the petitioners has either been cancelled or any proceedings are initiated to do so.

  4. Section 8(3)(b) of the CST Act, 1956, which entitles the petitioners to issue ‘C’ declaration form and purchase petroleum products at concessional rate of tax, reads as follows:

    8. Rates of tax on sales in the course of inter-State trade or commerce – 1. Every dealer, who in the course of inter-State trade or commerce, sells to a registered dealer goods of the description referred to in sub-section (3) shall be liable to pay tax under this Act, which shall be two per cent, of his turnover or at the rate applicable to the sale or purchase of such goods inside the appropriate State under the sales tax law of that State, whichever is lower;

    (3). The goods referred to in sub-section (1) – …(b) Are goods of the class or classes specified in the certificate of registration of the registered dealer purchasing the goods as being intended for resale by him or subject to any rules made by the Central Government in this behalf, for use by him in the manufacture or processing of goods for sale or in the tele-communications network or in mining or in the generation or distribution of electricity or any other form of power;

  5. Perusal of the above said provision of law would show that every dealer in the course of inter state trade or commerce, sells to a registered dealer goods of the description referred to in sub section (3), shall be liable to pay tax under the said Act, which shall be 2% of his turnover or at the rate applicable to sale or purchase of such goods inside the appropriate State under the sales tax of law of that State, whichever is lower. Sub Section (3)(b) further contemplates as to what are the “goods” referred to in sub section (1). It is specifically stated that the “goods” referred to in sub section (1) of Section 8 are goods of the class or classes specified in the Certificate of Registration of the registered dealer. It is further clarified therein that such purchase of goods by the registered dealer is for use by him in the manufacture or processing of goods for sale or in the telecommunication network or in mining or in the generation or distribution of electricity or any other form of power.

  6. Thus, it is evident that a registered dealer, who is holding a valid Certificate of Registration, which is in force, if satisfies the requirement contemplated under sub clause (3)(b) of Section 8, is entitled to pay the concessional tax, as provided under sub clause (1) of Section 8.

  7. There is no dispute to the fact that even after the introduction of GST, though several drastic amendments were made to CST Act, 1956, this particular provision of law viz., Section 8(3)(b) has not undergone any change. On the other hand, it is admitted by both sides that the said provision still holds the field.

  8. It is seen that these petitioners were purchasing the petroleum products, all along, at concessional rate of tax by issuing ‘C’ declaration forms in view of such entitlement conferred to them under Section 8(3)(b), as stated supra. The trouble started only when the Commissioner of Commercial Taxes of the State of Tamilnadu issued a communication dated 31-05-2018 to all the Joint Commissioners of the State, wherein it was informed that for the purpose of getting the benefit of concessional rate of paying the tax, while purchasing petroleum products by way of interstate trade, the dealer must be a person, who should be dealing in those six goods defined under Section 2(d) of the CST Act, 1956, after the amendment came into force on 01-07-2017.

  9. In other words, the crux of the contention of the respondents is that if a dealer having valid Certificate of Registration under the CST Act, 1956, seeks to purchase petroleum products from other State by availing concessional rate of tax against ‘C’ declaration forms, must be a dealer in dealing with only those six goods defined under Section 2(d) and not a dealer, just to utilise such petroleum products for the purpose of manufacturing or processing of goods for sale or telecommunication network or in mining or in the generation or distribution of electricity or any other form of power, as permitted under Section 8(3)(b) of the said Act. Thus, it is the clear case of the respondents that after the amendment, the CST is made applicable only for those six goods, as mentioned above and therefore, the benefits enjoyed out of the said provision has to be restricted only to the extent of those six goods. It is the further contention of the respondents that if the dealers purchase those six goods locally, they have to pay the tax at the rate of 28% and however, by way of interstate sale and by issuing ‘C’ Form, these petitioners are paying tax only at the rate of 2%. Therefore, it is contended that there is a huge leakage of revenue for the State.

  10. Let me consider the above objection of the respondents. It is true that the definition of term goods as previously defined under section 2(d) of the Central Sales Act, 1956, has changed after the introduction of GST and by substitution by Act 18 of 2017 with effect from 01-07-2017. The definition of “goods” under section 2(d) prior to amendment was an inclusive definition, which reads as follows:

    “2. Definitions:- In this Act, unless the context otherwise requires,-

    …(d) “goods” includes all materials, articles, commodities and all other kinds of movable property, but does not include Newspapers, Actionable claims, Stocks, Shares and Securities;”

  11. After amendment, the term goods is defined under Section 2(d) as follows:

    “2. Definitions:- In this Act, unless the context otherwise requires,-

    [(d) “goods means –

    (i) Petroleum crude;

    (ii) High speed diesel;

    (iii) Motor spirit (commonly known as petrol)

    (iv) Natural gas

    (v) Aviation turbine fuel and

    (vi) Alcoholic liquor for human consumption.]”

  12. Therefore, it is evident that the inclusive definition of “goods” as stood prior to the amendment has now become exhaustive, after the amendment, confining only to the above six products.

    Therefore, the term goods wherever occurs in the Central Sales Tax Act, 1956, has to be construed in the light of the definition made under Section 2(d) after the amendment.

  13. By keeping the above statutory position with regard to the definition of goods in mind, let me consider the objections raised by the respondents with regard to the purchase made by these petitioners in respect of petroleum products/HSD outside the State of Tamil Nadu as an inter state trade. I have already extracted Section 8(3)(b) supra. The crux of the contentions raised by the respondents to deny the benefit under Section 8(3)(b) to these petitioners is that the purchasing goods and manufacturing or selling goods of the petitioners are not one and the same. In other words, only when the goods purchased and the goods manufactured or sold, are one and the same and more particularly, only when such goods also falls under any one of the six items referred to under section 2(d), the petitioners are entitled to the benefit under section 8(3)(b).

  14. I have given my careful consideration to the above said contentions and also perused the above said provision of law viz., Section 8(3)(b) with utmost care. In my considered view, the above contention of the respondents cannot be accepted as valid in law in view of the fact that Section 8(3)(b) stands unamended even as on today and holds the field. As per the said provision of law, the dealer, who purchases the goods in the course of inter state trade, is entitled to get the benefit of concessional rate of tax, if the purchased goods is used by the said dealer in anyone of the following activities:

    a) in the manufacture of processing of goods for sale;

    b) use in the telecommunication network;

    c) use in mining;

    d) use in the generation or distribution of electricity or any other form of power;

  15. Therefore, it is very clear that though the “goods” as defined under Section 2(d), is purchased by the dealer by availing benefit of concessional rate of tax under Section 8(3)(b), it is not necessary that such dealer must be a person of manufacturing or processing only the same goods for sale to avail such benefit. On the other hand, if the said goods so purchased is put into use for the mining or for the telecommunication network or for the generation and captive consumption of electricity or distribution of the same or any other form of power as well, such of those dealers, who are engaged in those activities are also entitled to the benefit under Section 8(3)(b).

  16. At this juncture, it is to be noted that though the definition of “goods” under Section 2(d) was amended as stated supra, the legislature thought fit not to amend Section 8(3)(b) in any manner. On the other hand, in their wisdom, left the said provision as it is, so as to enable the dealers, who come within the purview, ambit and scope of Section 8(3)(b) to enjoy the benefit derived out of the said provision continuously as they were enjoying even before the amendment of Section 2(d).

  17. Even otherwise, if there is an ambiguity in a provision of law or two provisions under the same statute contradict each other, the benefit of interpretation out of such ambiguity or contradiction should always go in favour of the assessee, since tax laws need to be with absolute clarity, not to give any room for interpretation in more than one way. Therefore, even assuming that there is a contradiction between Section 2(d) and Section 8(3)(b) of the CST Act, in terms of the understanding of the definition of “goods” or context in which it has to be dealt with under Section 8(3)(b), I am of the firm view that the benefit that is being enjoyed by the dealer out of the unamended provision of Section 8(3)(b) should continue to flow till any change is made to the said provision.”

    In light of above the ‘C’ form can be used in given facts.

    In my opinion there cannot be question of levy of penalty for wrong use. Otherwise also penalty is discretionary. When there are judgments directing to issue ‘C’ form, even if it is held to be wrong use on merits in future, still it will not be liable to penalty as it is matter of interpretation and not deliberate wrong use. Therefore, no issue of penalty.

Nature of the Game

Fantasy sports games are games which occur over a pre-determined number of rounds (which may extend from a single match/ sporting event to an entire league or series) in which participating users select, build and act as managers of their virtual teams (constituted of real players or teams) that compete against virtual teams of other users, with results tabulated on the basis of statistics, scores, achievements and results generated by the real individual sportspersons or teams in certain designated professional sporting events. The winner of such fantasy sports game is the participant whose virtual team accumulates the greatest number of points across the round(s) of the game. The drafting of a virtual team involves the exercise of considerable skill as the user must first assess the relative worth of each athlete/ sportsperson as against all athlete/ sportspersons available for selection. The user has to study the rules and make evaluations of the athlete’s strengths and weaknesses based on these rules. The online fantasy sport games are offered through the platform require material and considerable skills in terms of ‘drafting’ and ‘playing’ which are the determinative factors in the results of the game and winning outcomes thereby. In such fantasy sports games, the platform provider provides facilities to participate in the game through a software programme and assists the participants by different modes, including FAQs (Frequently Asked Questions), examples, etc.

Whether such transactions constitute Goods, Services or Actionable claims under the Pre-GST regime?

  1. Sales Tax Law Implications:In the Federal set-up of the Government, Sales Tax or Value Added Tax (VAT) was earlier charged by the respective State Governments, on the sale or purchase of goods. Every State had their own enactment but the scheme was to charge tax on the sale of goods. For the purposes of levy, goods did not include actionable claims, money, shares and securities, etc.

  2. Actionable Claims:The term ‘actionable claim’ is defined under Section 3 of the Transfer of Property Act, 1882 as under;

“‘actionable claim’ means a claim to any debt, other than a debt secured by mortgage of immoveable property or by hypothecation or pledge of moveable property, or to any beneficial interest in moveable property not in the possession, either actual or constructive, of the claimant, which the Civil Courts recognize as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent.

(Emphasis supplied)”

While deciding the issue of taxability of lottery tickets under various Delhi General Sales Tax law, Hon’ble Supreme Court in Sunrise Associates v. Government of NCT of Delhi & Ors., 145 STC 576 held that, “The right to participate in the draw is a part of the composite right of the chance to win and it does not feature separately in the definition of the word lottery. It is an implicit part of the right to win, it is not a different right. The separation is spacious since neither of the right can stand without the other. There is no value in the mere right to participate in the draw and the purchaser does not pay for the right to participate. The consideration is paid for the chance to win. There is no distinction between the two rights. The right to participate being an inseparable part of the chance to win is therefore, part of an actionable claim. The only object of the right to participate would be to win the prize. The transfer of the right would thus, be of a beneficial interest in movable property, not in possession. By this reasoning also, a right to participate in a lottery is an actionable claim… The sale of lottery ticket does not involve sale of goods within the meaning of the Sales Tax Acts of the different States. At the highest there is the transfer of an actionable claim which the state sales tax laws have uniformly excluded from the definition of sale of goods.

(Emphasis supplied)”

  1. Service Tax Law Implications :
    Under the Finance Act, 1994, the value of taxable services are charged to tax which is called Service Tax. Relevant portions of Section 65B (44) of the Finance Act, 1994 that defines ‘service’ is reproduced as under;

(44) ‘service’ means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include-

(a) an activity which constitutes merely,-

(i) …..

(ii) …..

(iii) a transaction in money or actionable claim;

(b) ….

(c) ….

Explanation 1: ……

Explanation 2: For the purposes of this clause, the expression ‘transaction in money or actionable claim’ shall not include-

(i) ……

(ii) any activity carried out, for a consideration, in relation to, or for facilitation of, a transaction in money or actionable claim, including the activity carried out-

(a) by a lottery distributor or selling agent in relation to promotion, marketing, organising, selling of lottery or facilitating in organising lottery of any kind, in any other manner;

(b) ……”

As per Section 65B (1), “‘actionable claims’ shall have the meaning assigned to it in Section 3 of the Transfer of Property Act, 1882”.

As per Section 65B (15), “‘betting or gambling’ means putting on stake something of value, particularly money with consciousness of risk and hope of gain on the outcome of a game or a contest, whose result maybe determined by chance or accident or on the likelihood of anything occurring or not occurring.”

As per Section 65B (25), “goods means every kind of movable property other than actionable claim and money.”

As per Section 65(105)(zzzzn), “‘taxable services’ means any services provided or to be provided to any person by another person for promotion, marketing, organising or in any other manner, assisting in organising games of chance including lottery, bingo or lotto in whatever form or by whatever name called, whether or not conducted through internet or other electronic network.”

Undoubtedly, actionable claims were not subject matter of levy of tax under the Finance Act, 1994. However, the service portion of the actionable claim was subject to levy on account of Explanation 2 appended to Section 65B (44), i.e., any activity carried out for a consideration in relation to, or for facilitation of a transaction in money or actionable claim. Hence, for the purposes of Section 65(105)(zzzzn), the portion of the monetary consideration received was subject to tax in the case of game of chance, lottery, etc. In other words, the value of the services for assisting in organising games of chance was subject to tax under the Service Tax regime. Hon’ble Supreme Court of India in Union of India v. Martin Lottery Agencies Ltd., in Civil Appeal No. 3239 of 2009, dated 05th May, 2009 while deciding a question and approving Hon’ble Sikkim High Court’s judgment held that, the activity of the distributor of lottery ticket or promotion and marketing of lottery ticket for their clients would be exigible to Service Tax. In the said judgment, it was also held that, it is not the entire face value of ₹ 100/- which is subject to tax. It is only the commission or the service rendered for promoting and marketing the lottery ticket for the client, i.e., ₹ 30/- which would be subject to tax. The same view was taken by Hon’ble Kerala High Court in P. Murleedharan v. Union of India, Writ Petition No. 19625 of 2009, dated 19th August, 2011. In Future Gaming Solutions India Pvt. Ltd. v. UOI, 67 VST 58 Hon’ble Sikkim High Court held that, “The power to tax on lotteries or in betting and gambling is not available under any of the Entries of List I of the Seventh Schedule to the Constitution. However, such power is germane to and emanates from Entry 62 of List II in the Seventh Schedule, meaning thereby that the residuary power to enact a law imposing a tax on lotteries would not be available to the Parliament. Applying the principles of pith and substance the power to levy tax on lotteries being a game of chance and includes in the expression betting and gambling in Entry 62, List II, the State Legislature has the exclusive legislative competence and jurisdiction of Parliament to levy such a tax in exercise of its residuary power under Entry 97 of List I read with Article 248 of the Constitution stands excluded….. Therefore, the activity of bulk purchases of lottery ticket by the purchaser from the State Government on full payment on a discounted price is a natural business transaction…. Where the transaction is purely that of sale and purchases from which the component of services cannot be clearly segregated and is undiscernible, no service tax is payable. Therefore, the activity of the purchaser cannot be construed to be service rendered to the State Government to fall within the purview of service tax in the absence of any element of service in such activity.”

  1. Sale of Goods Versus Tax on Service Component on Goods:Under transactions in the nature of lottery, betting, gambling, wagering, online gaming, online fantasy sports, it was the service portion which was subject matter of levy of service tax under the Finance Act. The remnant portion undoubtedly constituted of goods and being actionable claims, was not subject to levy under the local Sales Tax laws including VAT for the simple reason that, actionable claims were excluded from the subject matter of tax, i.e., goods. Hon’ble Supreme Court in B. R. Enterprises v. State of U.P., 120 STC 302 held that lotteries are form of gambling. Gambling activities are in their very nature and essence extra commercium. In lottery there is an element of chance and no skill. In Sunrise (supra) Hon’ble Supreme Court held that, sale of lottery ticket does not involve sale of goods within the meaning of Sales Tax Acts of the different States. At the highest there is the transfer of an actionable claim which the State Sales Tax laws have uniformly excluded from the definition of sale of goods. However, the service rendered by the platform provider or the ticket distributors were subject to tax under the Finance Act as Service Tax. In short, the service portion was subject to levy as detailly discussed in paragraph 3.

When the transaction consisted of both goods and services components, then the question came up as to whether goods component could be taxed under the local tax laws and whether the service component could be taxed under the Finance Act as Service Tax? Hon’ble Madras High Court in AGS Entertainment Pvt. Ltd. v. UOI, 65 VST 88 relying upon various judgments of Hon’ble Supreme Court, viz., Association of Leasing & Financial Services Companies, 35 VST 549 (SC), Bharat Sanchar Nigam, 3 VST 95 (SC), Federation of Hotel & Restaurant Association of India, 74 STC 102 and Tamil Nadu Kalyanamandapam Association, 135 STC 480 (SC) held that, “Two different activities could properly be regarded as two different matters for taxation. In other words, there could be two enactments each in one aspect conferring the power to impose a tax upon goods. The legislation cannot be held to be vitiated, merely because there is an element of overlapping in that both sales tax and service tax become leviable on the same assessee in respect of the same goods. There are two aspects, namely, the transfer of the right to use the goods or the permission to use the goods or enjoyment, which operate in different fields and merely because there is overlapping on certain aspects, it would not lose the distinctiveness of each of the aspects.”

In view of the above discussions, it is clear that, the service component of the actionable claim was subject matter of levy under the Finance Act whereas, other than service components were in the nature of actionable claims and hence, were not subject to levy under the local tax laws in respect of transactions of lottery, fantasy sports gaming, betting, wagering, gambling, etc.

Whether such transactions constitute Goods, Services or Actionable claims under the post-GST Regime?

  1. Levy Provision:As per Section 9 of the Central Goods and Services Tax Act, 2017 (CGST Act), there shall be levied a tax called Central Goods and Services Tax on all inter-state supplies of goods or services or both on the value determined u/s. 15 as per the Rate Notification notified by the Government on the recommendations of the Council. The supply of goods and services is subject matter of levy of tax.

Goods as defined u/s. 2(52) means, “[E]very kind of movable property other than money and securities, but includes actionable claim, growing crops, grass and things attached to or forming part of land which are agreed to be severed before supply or under a contract of supply.

(Emphasis supplied)”

Services as defined u/s. 2(102) means, “[A]nything other than goods, money or securities, but includes activities relating to the use of money or its conversion by cash or by any other mode………”

Actionable claims as defined u/s. 2(1) shall have the same meaning as assigned to it in Section 3 of the Transfer of Property Act, 1882.

As per Section 2(17), “[B]usiness includes any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity whether or not it is for a pecuniary benefit……

(Emphasis supplied)”

As per Section 2(108), “[T]axable supply means a supply of goods or services or both which is leviable to tax under this Act.

(Emphasis supplied)”

As per Section 15(1), “The value of supply of goods or services or both shall be the transaction value which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.”

The above charging provision and its related definitions make it apparent that, CGST will be charged on the taxable supply of goods and services on the value as determined by Section 15 of the CGST Act. Actionable claims are included in the definition of goods. Hence, supply of actionable claims is subject to tax, unless it is specifically excluded or exemption is provided. Similarly, supply of taxable services are subject to tax on the transactional value determined by Section 15 of the Act and the rate applicable will be as per the notified rates published by the GST Council. However, such supplies should be in the course or in the furtherance of business.

Entry 62 of List II (State List) in Seventh Schedule of the Constitution of India, which conferred the power to levy taxes on luxuries including taxes on entertainment, amusement, betting and gambling has now been taken out from the State’s power by the Constitutional 101st Amendment Act, 2016. Thereby, Central Government has been empowered to levy tax on such transactions under Entry 97 of List I (Union List).

  1. Meaning of Supply: Section 7 of the CGST Act provides the concept of supply which includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course of or in the furtherance of business.

There are three Schedules that are appended to the CGST Act. Schedule I deals with the activities without consideration, but are subject matter of levy without consideration. Under Schedule II, there are certain transactions which are even though not in the nature of goods or services, are deemed to be treated as supply of goods and supply of services and similarly, some classes of goods are treated as supply of services. Schedule III deals with activities and transactions although in the nature of supplies of goods and services but, for the purpose of the CGST Act, they are excluded from the ambit of supply of goods and services, so as to not levy tax.

The term ‘wager’ is included in the definition of business. Hence, the meaning of the term ‘wager’ is worth understanding. The Law Lexicon, P. Ramanatha Aiyer, 2004 Reprint Edition defines ‘wage’ as, “The giving of a security for the performance of anything.” In the same book it is specified that, “There is no distinction between the expression gaming and wagering used in the English Statutes and in the earlier Indian Acts and the expression by way of wager in Section 30 of the Contract Act.” Hence, in view of the said meaning the giving of a security for the performance of anything against a price consideration is also in the course of business.

  1. Relevant Entries in the Schedules:Entry 5 of Schedule II deals with supply of services although the transactions are in the nature of immovable property or the transactions involve goods but, for the purposes of the CGST Act, they are deemed to be treated as supply of services. Clause (c) and (d) of Entry 5 is relevant for our purpose which is reproduced as under:

(c) [T]emporary transfer for permitting the use or enjoyment of any intellectual property right;

(d) [D]evelopment, design, programming, customisation, adaption, upgradation, enhancement, implementation of information technology software.”

Schedule III deals with transactions or activities which are actually supply of goods and services but for the purposes of the CGST Act are not considered or treated as supply of goods or supply of services and such activities or transactions are not subject matter of tax. Entry 6 of Schedule III is relevant for our purpose. Entry 6 reads as, “actionable claims other than lottery, betting and gambling.”

In view of the above, the platform of information technology software for such online fantasy sports games is nothing but temporary transfer or permission to use the intellectual property right in the nature of information technology software. Undoubtedly, goods include actionable claims for the purposes of the CGST Act, but by virtue of Schedule III, other than lottery, betting and gambling all other remaining actionable claims are excluded from levy of tax. Hence, what is subject matter of levy of tax is the lottery, betting and gambling and no other actionable claim.

  1. Classification of the impugned transactions as per the Rate Notifications

  2. a) Rate Notifications (Supply of Goods): Neither actionable claims nor betting or gambling were classified under the Schedule Entries of goods. However, lottery is classified under Serial No. 242 of Schedule II, subject to tax at the rate of 12% and in view of Explanation 1, the valuation has to be made 100/112 of the face value of the ticket in case of lottery run by the State Government. In case of lotteries authorized by the State Government, Serial No. 228 of Schedule IV, subject to tax at the rate of 28% on the value determined as per Explanation, i.e., 100/128 of the face value of the tickets is applicable. Therefore, betting and gambling being taxable were subject to tax under the residuary entry Serial No. 453 subject to tax at the rate of 18%. Subsequently, an amendment was brought by Notification No. 6 of 2018 (Central Tax Rate) dated 25th January, 2018 wherein Serial No. 229 was brought in Schedule IV which is subject to tax at the rate of 28% and the entry reads as, “Actionable claim in the form of chance to win in betting, gambling or horse racing in race club.”

  3. b) Rate Notifications (Supply of Services):Tariff Entry 99.84 (relevant portion) present in (ii) of Serial No. 22, Notification No. 11 of 2017, Central Tax (Rate), dated 28th June, 2017 reads as, “Telecommunications, broadcasting and information supply services………”

Explanatory Note appended to the said Tariff Entry reads as under;

998439 Other on-line content n.e.c.

This service code includes games that are intended to be played on the Internet such as role-playing games (RPGs), strategy games, action games, card games, children’s games; software that is intended to be executed on-line, except game software, mature theme, sexually explicit content published or broadcast over the Internet including graphics, live fees, interactive performances and virtual activities; content provided on web search portals, i.e., extensive databases of Internet addresses and content in an easily searchable format; statistics or other information, including streamed news; other on-line content not included above such as greeting cards, jokes, cartoons, graphics, maps

Note: Payment may be by subscription, membership fee, pay-per-play or pay-per-view.

This service code does not include:

– software downloads, cf. 998434

– on-line gambling services, cf. 999692

– adult content in on-line newspapers, periodicals, books, directories, cf. 998431”

Tariff Entry 99.96 (relevant portion) present in (iiia), (iv) and (v) of Serial No. 34 of Notification No. 11 of 2017, Central Tax (Rate), dated 28th June, 2017 reads as under;

(iiia) Services by way of admission to entertainment events or access to amusement facilities including casinos, race club, any sporting event such as Indian Premier League and the like.

(iv) Services provided by a race club by way of totalisator or a license to bookmaker in such club.

(v) Gambling.”

Explanatory Note appended to the said Tariff Entry published by Central Board of Indirect Taxes and Customs (CBIC) on 12th June, 2018 clarifies that, 99.96.92 consists of the following services;

99.96.92 Gambling and betting services including similar online services

This service code includes:

  1. on-line gambling services

  2. on-line games involving betting/ gambling

  3. off-track betting

  4. casino and gambling house services

  5. gambling slot machine services

  6. other similar services”

The service component of the amount taken from participants is subject to levy as supply of services under Tariff Entry 99.84.39 as online games as explained in the Explanatory Note as above. (Does not include online gambling services). Hence, it is subject to tax at the rate of 18%. The balance portion being actionable claims towards such online gaming (which is not betting or gambling) have to be treated as unclassified actionable claims and not subject to tax. Therefore, the valuation rule provided under Rule 31A of the Central Goods and Services Tax Rules (CGST Rules) is not applicable as the same is applicable to lottery, betting and gambling.

  1. Whether 99.84.39 is a Special Entry and will prevail over any other General Entry: Wherever two competing entries are available in the Schedule Entry, i.e., special entry and general entry, then the impugned product and its classification is a greater task. The normal rule is that each entry enumerating the goods should be given its natural or normal meaning as understood by those who deal with those and that if there are two entries where one entry is broader and covers an entire class of goods and the other entry covers some of the goods out of the said class, the latter entry should be considered as special entry in respect of those goods. Sometimes if the goods are falling in two entries, which are subject to tax at two different rates, the theory of specific entry will prevail over general entry. For e.g. gold/silver plated idols frames will fall under both, gold entry, which is subject to tax at 3% as well as under frame or metal entry, which is subject to a higher rate. In such circumstances the specific entry will definitely be the entry of articles of gold and silver which is required to be adopted. Similarly, a carpet which is fit into the car as per the specifications and design given by the car manufacturer; would be an accessory of cars and shall fall under the specific entry of accessories of cars rather than being classified under the general entry of carpets. However, in such circumstances, one has to look into the interpretation given in the General or Specific Explanatory notes to the HSN, (WCO). Hon’ble Supreme Court in the matter of M. P. Agencies v. State of Kerala (2015) (7 SCC 102)has held that, “As per the said Rules of Interpretation, where the commodities have been given HSN numbers, the same meaning would be given for classification under the Customs Tariff Act, 1975 and judgments applicable to corresponding entries in Customs Tariff Act- Where commodities are not assigned with any HSN number, they are to be interpreted as understood in common or commercial parlance- In case of inconsistency between meaning of commodity without HSN number and commodity with HSN number, commodity without HSN number should be interpreted by including commodity in that entry, which has been given HSN number.”

The principle laid down as above, clearly states that if the HSN number is clear, then it is necessary to adopt the meaning for determining the purpose of tax rate, otherwise they are to be interpreted as understood in common or commercial parlance or the other necessary rules of commodity classification. In the matter of Mayuri Yeast India Pvt. Ltd. v. State of UP and Another (2008) 14 VST 259 (SC) it was held that, “If there is a conflict between two entries one leading to an opinion that it comes within the purview of the tariff entry and another the residuary entry, the former should be preferred.”

In view of the above, the specific entry being 99.84 and the Explanatory Notes appended to it clearly leans towards the said entry, the same is a specific entry and will prevail over other general and residuary entries. Moreover 99.96.92 in fact deals with gambling and betting services. As explained above, the impugned transaction is not online gambling services and therefore, the scope of the said entry is out of our purview and when a specific entry is available in the tariff along with the Explanatory Notes provided by CBIC, the same is binding due to Section 165 of CGST Act.

  1. Whether Online Fantasy Sports Games constitute as part of Gambling:Online fantasy sports consists of a skill game for which participants have to acquire knowledge in the respective sports and the players therein. Therefore, they are not to be treated as gambling. Hon’ble Punjab High Court in Shri Varun Gumber v. Union Territory of Chandigarh, CWP No. 7559 of 2017 extensively considered the nature of online fantasy sports game and after considering the judgments of Hon’ble Supreme Court held as under;

In view of the finding rendered by the Hon’ble Supreme Court aforementioned, it leaves no manner of doubt that on the scope and ambit of the term game “mere skill” in the context of the present case, in other words, the Hon’ble Supreme Court has held that :- “i) the competitions where success depends upon the substantial degree of skill are not gambling; and ii) despite there being an element of chance, if a game is preponderantly a game of skill it would nevertheless be a game of “mere skill”. It has been found that horse racing like foot racing, boat racing, football and baseball is a game of skill and judgment and not a game of chance. The aforementioned finding squarely applies to the present case. Even from the submissions and contentions of respondent-company and factual position admitted in writ petition, I am of the view that playing of fantasy game by any participant user involves virtual team by him which would certainly requires a considerable skill, judgment and discretion. The participant has to assess the relative worth of each athlete/sportsperson as against all athlete/sportspersons available for selection. He is required to study the rules and regulations of strength of athlete or player and weakness also. The several factors as indicated above submitted by the respondent – company would definitely affect the result of the game. Admittedly, the petitioner himself created a virtual team of a Cricket Match between two countries as indicated in the website by choosing 11 players out of total players, who were to play for two countries collectively and after forming a virtual team of 11 players as per his own selection, knowledge and judgment, which is thoughtful. Will, he join various leagues for the leagues selected by him and after registration which was declared before participating, was not about possibility of winning or losing like horse riding not every better is winner. The respondent company’s website and success in Dream 11’s fantasy sports basically arises out of users exercise, superior knowledge, judgment and attention. I am of the further view that the element of skill and predominant influence on the outcome of the Dream 11 fantasy than any other incidents are and therefore, I do not have any hesitation in holding any sports game to constitute the game of “mere skill” and not falling within the activity of gambling for the invocation of 1867 Act and thus, the respondent company is therefore, exempt from the application of provisions, including the penal provisions, in view of Section 18 of 1867 Act. Equally so, before I conclude, I must express that gambling is not a trade and thus, is not protected by Article 19(1)(g) of Constitution of India and thus, the fantasy games of the respondent -company cannot said to be falling within the gambling activities as the same involves the substantial skills which is nothing but is a business activity with due registration and paying the service tax and income tax, thus, they have protection granted by Article 19 (1)(g) of Constitution of India.”

Hon’ble Bombay High Court in Gurdeep Singh Sachar v. Union of India, Criminal PIL Stamp No. 22 of 2019 dated 30th April, 2019 held as under;

In respect of the first issue, after considering the very same activities of the respondent No.3 at considerable length, it has already been held by the Punjab and Haryana High Court that the activities performed by the respondent No.3 do not amount to ‘gambling’, even as per the Public Gambling Act, 1867. The respondent No.3 refers and relies on the findings contained in the said judgment. Admittedly, SLP filed there against has been dismissed. The Punjab and Haryana High Court has categorically held that these are games of skill and not games of chance. Various judgments have been referred and relied upon in the said judgment. There is no reason to take a different view……

It is evident that the expressions ‘betting’ or ‘gambling’ were used interchangeably in Section 65B(15) of the Finance Act, 1994. Again the test applicable was whether it was a game of chance or game of skill. Only if the result of the game/contest is determined merely by chance or accident, any money put on stake with consciousness of risk and hope to gain, would be ‘gambling’ or ‘betting’. There is no merit in the submission that the result of their fantasy game/contest shall be considered as merely by chance or accident notwithstanding involvement of substantial skill. The petitioner claims that the result would depend largely on extraneous factors such as, who amongst the players actually play better in the real game on a particular day, which according to the petitioner would be a matter of chance, howsoever skilful a participant player in the online fantasy game may be. The petitioner has lost sight of the fact that the result of the fantasy game contest on the platform of respondent No.3, is not at all dependent on winning or losing of any particular team in the real world game. Thus, no betting or gambling is involved in their fantasy games. Their result is not dependent upon winning or losing of any particular team in real world on any given day. In these circumstances, there is no plausible reason to take a contrary view than that taken by the Hon’ble Punjab and Haryana High Court, which judgment has already been upheld by the Hon’ble Supreme Court in the SLP filed against the respondent No.3 itself. Moreover, the said issue is also covered by a judgment of 3 Judge Bench of the Hon’ble Supreme Court, to which detailed reference is made in the order of the Hon’ble Punjab and Haryana High Court. It is thus clear that the activity of the respondent No.3 do not amount to ‘gambling’ or ‘betting’ or ‘wagering’ even if the definition contained in Finance Act, 1994 is taken into consideration.”

In view of the above, it is apparent that, online fantasy sports games are games of skill and not gambling.

  1. Valuation of Service Component of Online Fantasy Sports Games:The levy provision, i.e., Section 9 of the CGST Act directs that, tax shall be levied on the supply of goods or services or both on the value determined u/s 15. As per Section 15 the value of supply of goods or services or both shall be the transaction value which is the price actually paid or payable for the said supply of goods or services or both where the supplier or the recipient of the supply are not related and the price is the sole consideration of supply.

Consideration as defined u/s. 2(31) in relation to supply of goods or services or both includes, “[A]ny payment made or to be made whether in money or otherwise in respect of, in response to or for the inducement of the supply of goods or services or both…”

Undoubtedly, the price received in online gaming services and in online fantasy sports, two price components are involved, one for the services or the facilities provided by the organiser and the other one is towards the prize money where some person(s) lose and some person(s) gain. The first part is categorised as supply of services and the consideration if specified specifically, the same is subject to tax. The balance portion, i.e., the prize money depends upon an event and is an actionable claim and the same is not subject to tax.

Hon’ble Bombay High Court in Gurdeep Singh Sachar (supra) held that, “The scope of definition of ‘consideration’ extends only in relation to “the supply of goods or services or both”. Since, the said activity or transaction relating to the actionable claim qua the amounts of participants pooled in escrow arrangement, for which only acknowledgement is given, is neither supply of goods nor supply of services, the same is clearly out of the purview of the expression ‘consideration’. Since the CGST Act itself do not allow the imposition of Tax on such ‘actionable claim’ in relation to the Online Fantasy Sports Gaming of the respondent No. 3, it being other than lottery, betting and gambling, the said Rule 31A(3) of CGST Rules 2018 cannot be read in such a manner so as to override the parent CGST Act. The said Rule 31A(3) reads as under :-

31A. Value of supply n case of lottery, betting, gambling and horse racing.-

(3) the value of supply of actionable claim in the form of chance to win in betting, gambling or horse racing in a race club shall be 100% of the face value of the bet or the amount paid into the totalisator.”

Since the actionable claim in the Online Fantasy Sport Gaming of the respondent No. 3 are amongst such actionable claims as per Schedule III and Section 7(2) of the Act, which are not considered as ‘supply of goods’ or ‘supply of services’, Rule 31A has no application. Moreover, actionable claim referred to in Rule 31A is limited to only activities or transactions in the form of chance to win in “lottery” or “betting” or “gambling” or “horse racing in a race club”. Thus, Rule 31A which is restricted only to such four supplies of actionable claim, has no application in this case.”

In view of the above, in every online fantasy sports game, there is clear and separate amount taken from the participants towards service charges and the same is subject to tax as supply of services and not the entire amount deposited by the participants.

All the taxation statutes provide for several field activities in order to detect prevent and evasion of tax. Such activities include inspection of business premises, goods, books of account and conveyances; unannounced visits, disguise operations, engaging informers, data sharing, surveys, searches, seizure, confiscation, etc. It is needless to state that all such activities are to be carried out only within the framework of law, because everyone has the right to privacy, which includes the right not to have their person or home or business premises sealed/ searched, their possessions seized, etc. However the right of privacy is not absolute and an infringement of that right would be justifiable if a statute provides for it. Taxation Acts infringe upon such right of tax payers by necessary provisions, in which case, such infringement would be reasonable as well, justifiable.

GST system of taxation implemented in the country from July, 2017 is no exception. GST Acts contain the provisions relating to such field activities. Important among them are (a) inspection, (b) search, (c) seizure, (d) confiscation, (e) auction, (f) arrest and (g) prosecution. In this first article, we are discussing ‘inspection’.

1. Inspection

Whereas the word ‘audit’ has been defined in Section 2(13) of the CGST Act, 2017 (hereinafter referred to as “the Act”) the word ‘inspection’ has not been defined in the Act. ‘Audit’ is defined as follows:-

2 (13) “Audit” means the examination of records, returns and other documents maintained or furnished by the registered person under this Act or the rules made thereunder or under any other law for the time being in force to verify the correctness of turnover declared, taxes paid, refund claimed and input tax credit availed, and to assess his compliance with the provisions of this Act or the rules made thereunder;”

Conduct of ‘audit’ by the tax authorities has been specified in Section 65 of the Act. In the case of ‘audit’, an advance intimation would be given by the authorised officer and whereas in the case of ‘inspection,’ no such advance intimation would be given. There is an element of surprise in the case of ‘inspection’. An ‘audit’ is not ‘inspection’ and vice versa. Audit contemplates in depth study and analysis of documents. During the course of audit, systems are checked against the pre-set statutory provisions. The goal of audit generally is assessing statutory compliance. Audit consumes more time and whereas inspection is need-based and could be completed in a day or two, by mostly focusing on detecting evasion or avoidance of tax.

According to dictionaries, ‘inspection’ means the act of looking at something carefully, or an official visit to a building or organisation to check that everything is correct and legal and careful or thorough examination or scrutiny. Section 67(1) of the Act provides for ‘inspection.’ Rule 139 of the CGST Rules, 2017 (hereinafter referred to as Rules) prescribes the procedure. Only an authorized officer has power to inspect any place of business, warehouse, godown, conveyance etc. Such authorization in writing in Form GST-INS-01 (It is common for inspection and search. Appropriate item has to be ticked) has to be given by the jurisdictional Joint Commissioner to any other officer subordinate to him, only when he has reason to believe that

“(a) a taxable person has suppressed any transaction relating to supply of goods or services or both or the stock of goods in hand, or has claimed input tax credit in excess of his entitlement under this Act or has indulged in contravention of any of the provisions of this Act or the rules made thereunder to evade tax under this Act; or

(b) any person engaged in the business of transporting goods or an owner or operator of a warehouse or a godown or any other place is keeping goods which have escaped payment of tax or has kept his accounts or goods in such a manner as is likely to cause evasion of tax payable under this Act.”

In Circular No. 122/41/2019-GST dated 5-11-2019, CBIC has issued instructions that search authorization, inspection notices, summons, etc., shall bear computerised Document Identification Number (DIN). Hence the said authorisation must also bear such DIN. It shall be pertinent to state that such authorisation has to be complied with, within a specified period. It is valid only for (specified) days.

In all the taxation statutes we see the words ‘reason to believe’. It doesn’t mean pure subjective satisfaction of the officer. In the case of S. Narayanappa vs. CIT (63 ITR 219), the Honourable Supreme Court held that the belief must be in good faith and cannot merely be a pretense. In another case of Sheo Nath Sing vs. AAC (82 ITR 147), the Honourable Supreme Court held that suspicion, rumour or gossip cannot be the basis and that the belief must be that of an honest and reasonable person based on reasonable grounds. It has also been held that the ITO would be acting without jurisdiction if the reason for his belief that the conditions are satisfied does not exist or is not material or relevant to the belief required by the provision.

Such inspection must be carried out during ‘reasonable times’. In the case of P. Lakshamanarao and Sons vs. Special CTO (E) Vijayawada (13 STC 860), the Honourable High Court of Andhra Pradesh held as follows, in relation to the inspection of a hotel:-

The antithesis of “reasonable time” would be “unreasonable time”; so that, if “at all reasonable times” comprehends the period from 4:30 in the morning to 10 in the night, the unreasonable time would only be confined to the period between 10 p.m. and 4:30 a.m., when the establishment is closed. To our mind, “reasonable time” must have some relation to the nature of the business, and to the time of the day in relation to the working hours, so as to enable an inspection to be made for such period or periods during the day conveniently as the circumstances will permit.”

The proper officer conducting inspection is obliged to furnish a copy of the authorisation to the taxable person. It is customary to show the identity proof. It is also expected that the taxable person and his staff must co-operate during the inspection by answering all the relevant questions and by producing the relevant documents. Under Section 71(1) of the Act, inspection would be in relation to books of account, documents, computers, computer programs, computer software whether installed in a computer or otherwise and such other things as the officer may require and which may be available at such place, for the purposes of carrying out any audit, scrutiny, verification and checks as may be necessary to safeguard the interest of revenue. In the case of Miriyala Venkateswara Rao, in re (2 STC 167), the Madras High Court held that money is not goods which can be inspected by the officer. Copy of the statement recorded from the person in-charge at the business premises along with physical stock statement if any taken must be handed over to such person and acknowledgment obtained. In the case of Life Line Devices vs. CTO, Narayanaguda Circle, Hyderabad (119 STC 52), the Honourable High Court of Andhra Pradesh held that the inspecting officers should forthwith stop collecting postdated cheques or money towards the estimated tax or even admitted to be due and leave it to the competent assessing officer to do that part of the job after giving opportunity to the assessee before passing an order in conformity of the Act. The same has been reiterated in the case of Anan Jewellers, Secunderabad vs. DCTO (22 APSTJ 135) by the Honourable Andhra Pradesh High Court. Spot collection of tax, penalty, etc., has been deprecated. Any amount shall be collected after following due assessment procedure.

Under Section 67(4), the officer authorised under sub-section (2) shall have the power to seal or break open the door of any premises or to break open any almirah, electronic devices, box, receptacle in which any goods, accounts, registers or documents of the person are suspected to be concealed, where access to such premises, almirah, electronic devices, box or receptacle is denied. There should be evidence on record about such denial. In the case of Syed Suhail Pasha vs. CTO (Enforcement) South Zone, Bengaluru (104 VST 160) the Honourable Karnataka High Court held that admittedly, at the time of inspection, the dealer was not only present, but also had co-operated with the inspection. Thus, his presence could not be denied. Moreover, the Department could not claim that he had refused to open any part of the building, or prevented the Commercial Tax Officer from inspecting the site. Hence, none of the circumstances mentioned in section 52(1)(f) of the Act was satisfied and the Commercial Tax Officer was not justified in directing that the premises should be sealed forthwith. Since the sealing order was de hors the law, it was clearly in violation of article 21 of the Constitution of India. The Department was not powerless in ensuring that the books of account were produced by the dealer and did not need a court order in order to exercise the power bestowed upon it by law. Under Section 72 of the Act, all officers of Police, Railways, Customs, and those officers engaged in the collection of land revenue, including village officers, officers of State tax, officers of Union territory tax and other notified Officers shall assist the proper officers in the implementation of this Act. Attention of the concerned person, whose premises is proposed to be inspected is drawn to the following para in the authorisation in Form GST-INS-01:-

“Any attempt on the part of the person to mislead, tamper with the evidence, refusal to answer the questions relevant to inspection / search operations, making of false statement or providing false evidence is punishable with imprisonment and /or fine under the Act read with sections 179, 181, 191 and 418 of the Indian Penal Code.”

We conclude this article by extracting relevant portion from the decision in the case of Binny Limited vs. ACTO (Int) LR South Zone, Bangalore (68 STC 366) decided by the Karnataka High Court:—

The object of conferring the power of inspection on an officer of the department, and for this purpose to enter any premises of a dealer, is for detecting suppression of turnover and evasion of tax. The element of surprise inspection, if it is called for in a given case, and where the officer has reason to believe that the dealer may not produce all books of account when called upon to do so, would be lost and the object of conferment of such powers on officers of the department defeated, if the dealer is given notice to produce such documents or is given advance intimation about the inspection.

These special powers conferred on an officer of the Department are meant to be exercised with due care and caution, in the light of the facts and circumstances of a given case. Such powers are not meant to be exercised in a routine manner without there being sufficient reasons for invoking the said power whether it be for inspection or for seizure. The actions of the officer under any of these provisions, would be subject to judicial review if any breach or contravention or excessive exercise is alleged.”

Claim for deduction as Bad debts

Assessee was a private company, consisting of two directors. Even though there was a partition effected between the brothers of one of the directors, the other brothers were demanding a share in properties. One of such properties, standing in the name of the Director, was purchased by the assessee company consisting of the director shareholders. The entire property was divided into three blocks. First two blocks were reserved for sale to outsiders, whereas third block was sold to members of Hindu Undivided Family (HUF) consisting of five Directors. Five flats were sought to be sold to the shareholders for a total sale consideration of ₹ 6.13 crore. Subsequently, a family settlement arrangement was arrived between members of HUF/their relatives and company and it was decided therein that assessee would waive right to recover dues of such consideration. According to assessee, said decision was taken in order to avoid future deadlock in the management of Company on account of any disputes arising between the family members who were also its shareholders. An Order was passed under Section 171, assessee filed its return claiming sale consideration waived off as bad debts. Assessing Officer opined that mere possibility that there could be future disputes / quarrels / differences between members of HUF, could not constitute a ground to hold that amount in question was bad debts. He, thus, rejected assessee’s claim. Tribunal, however, allowed claim raised by assessee. High Court by impugned order held that on facts, revenue could not contest assessee’s claim even after passing of order under section 171 and further, even otherwise. Since, only requirement of law was that amount should have been written off in books of account of assessee which was admittedly done.

The Commissioner (Appeals) considered the documents produced by the assessee. In terms of the partition effected, he held that the assessee came to know that the debts could not be recovered. That the family arrangement had been made only to avoid future disputes between the family members since some of them were directors of the assessee-company. He was of the view that a debt may become bad and irrecoverable either by an order of the Court of law or by the act of contracting parties.

Tribunal was justified in allowing assessee’s claim. Even SLP filed against impugned order was dismissed. Commissioner of Income Tax, Bangalore vs. Millennia Developers (P.) Ltd. [2018] 100 taxmann.com 369

Amount debited in profit and loss account in respect of obsolete spares:

In this case, the assessee debited ₹ 92,66,211/- as obsolete stores and spares and other items written off in the books of account for the A.Y. 2009-10.

AO allowed the items written off while framing the scrutiny assessment under Section 143(3) of the Income-tax Act. The ld. Commissioner of Income Tax took order of the assessment under suo motu revision under Section 263(3) of the Act as the revisionary authority was of the view that the order passed by the AO was erroneous in so far as it was prejudicial to the interest of the revenue on account of an amount of ₹ 92,66,211/- written off in the profit and loss account relevant to A.Y. 2009-10 as obsolete spares and other items written off.

Assessee submitted with respect to obsolete spares and other items written off, the same was allowed by the AO after applying mind to the facts of case and after considering the details submitted by the assessee and the annual return filed by the assessee company and only thereafter allowed the deduction on obsolete spares and other items written off ₹ 92,66,211/- and therefore, it was submitted that order of the AO cannot be said to be prejudicial to the interest of the revenue and therefore, it was requested to withdraw the notice under Section 263 of the Act.

The ld. Commissioner, however, set aside the assessment order on the said ground and remanded the matter to the AO in the light of the observations made in the order.

The assessee preferred an appeal against the order under Section 263(3) before the Tribunal. It was vehemently submitted that the ld. Commissioner under Section 263(3) found that certain inquiry was not held/conducted by the AO while accepting the assessee’s claim of written off obsolete spares and stores of ₹ 92,66,211/- and therefore, the assessment order was found to be erroneous and prejudicial to the interest of the revenue and consequently the Ld. Commissioner set aside the order of the AO and remitted the matter to the AO to reframe the assessment.

As far as the Order passed by the AO allowing the assessee to debit ₹ 92,66,211/- or obsolete spares and stores and other items written off are concerned, the ld. Commissioner in exercise of the powers under Section 263 of the Act has set aside the order passed by the order by observing that the contents of the assessee needs detailed examination which was not done by the AO at the time of the assessment proceedings. However, at the time of passing of assessment order, the said issue was considered by the AO in detail and while passing the scrutiny assessment, even otherwise, it was not open for Commissioner to exercise the powers under Section 263(3) of the Act.

The ld. Tribunal has specifically observed after considering the companies policy and accounting treatment of obsolete spares and stores written off and consistent practice followed by the assessee, items of stores and spares having individual value of rupees 10,000 or less were debited only at the time of consumption. The learned Tribunal has rightly held that AO was justified in accepting claim of the assessee in debiting ₹ 92,66,211/- from the profit and loss account, hence, the learned Tribunal has observed that the order passed by the AO cannot be said to be prejudicial to the interest of the revenue. Therefore, Commissioner was not justified in interfering in the Order passed by the AO in exercise of the powers under Section 263(3) of the Act.

The Hon’ble Gujarat High Court held that no interference of the Court is called for no substantial question of law arises as proposed by the revenue and the revenue appeal was dismissed. Tax Appeal No. 99 of 2017. Case: Pr. Commissioner of Income Tax-Vadodara and Ors. vs. Gujarat State Fertilizer & Chemicals Ltd.. Gujarat High Court.

Rural Development Expenses

It was a case of reassessment in which the assessee has claimed rural development expenses as business expenditure. CIT(A) has given a finding of the fact, the impugned amount was not expended wholly and exclusively for the purpose of business. This finding of fact is not rebutted by the assessee. In absence of material proving the expenses incurred for the business of the assessee, same cannot be allowed under Section 37 of the Act. Hence, appeal was dismissed for the said grounds of appeal.

The Hon’ble Tribunal, Jaipur Bench dealt with the issue that afforestation, plantation & environment expenses have been incurred for maintaining the gardens at its corporate office, mining site office, obtaining environmental clearances, obtaining mining area lease, fees paid to pollution control board, assessing the quality of water etc. This expenditure, therefore, has been made out and expended wholly and exclusively for the purposes of assessee’s business. The above disallowance was therefore, directed to be deleted.

This finding of fact was not controverted by revenue by placing any contrary material on record. Therefore, the said appeal of the revenue was dismissed and did not interfere with the order of the learned CIT(A). Rajasthan State vs. Assistant Commissioner of Income Tax 188 TTJ (JP) 137.

Contribution to death relief fund for employees (DRFE)

Entitled to deductions, Income-tax Act, Section 37 and 40A:

Contribution to death relief fund is entitled to deduction under Section 37, as it is exclusively for the welfare of employees, so as to be eligible for deduction as having been incurred for the purpose of assessee’s business. It was also pointed out that deduction of similar labour welfare expenses have been expected by the High Court, so that a different view is not possible in this case. It was in this view, the decision taken by the Tribunal affirming the view of the authorities that such deduction is barred under Section 40A(ix) was found to be not correct in light of law, i.e., deductible under Section 37 of the Income-tax Act – Madura Coats Pvt. Ltd. vs. Dy. CIT [2019] 417 ITR 115 (Madras).

Would expenditure incurred on upgradation of existing facilities constitute capital expenditure?

Facts of the case:

The assessee is the Cricket Club of India who had filed the return of income for assessment year 2007-08 while scrutinising the return of income. Assessing Officer noticed that the assessee had incurred expenditure of ₹ 3.91 crores in upgradation of cricket stadium and various other incidental requirements. The Assessing Officer was of the opinion that the expenditure incurred was capital in nature and, therefore disallowed the same. The assessee carried the matter in appeal. CIT(A) allowed part of the claim and restricted the disallowance to ₹ 1.85 crore. Both the sides carried the matter in appeal before the Tribunal. The Tribunal allowed the assessee’s appeal and dismissed the revenue’s appeal upon which the present appeal has been filed.

Perusal of the materials on record and in particular the impugned judgment of the Tribunal would show that the Respondent- assessee had organised several matches of ICC Champion’s Trophy. In order to do so, the assessee had taken upgradation of the stadium which included arranging the facility for training and warm up areas, providing passages, walk ways, staircase etc., improving the media facility, installation of electronic score board and other similar facilities. The Board had also expended in providing proper security and car parking facilities. It was in this background, the Tribunal had held that the expenditure was revenue in nature.

Looking to the nature of expenditure, it can be seen that the assessee did not create a new asset or create a source of enduring benefit. Essentially, the expenditure was for upgradation of the existing facilities. Appeal of Department was dismissed. – Principal CIT-1 vs. Cricket Club of India [2019] 265 Taxmann 95 (Bombay High Court).

Expenditure incurred to increase efficiency without enhancing of Plant & Machinery

Large expenses was spent on major repairs and maintenance of machinery but no enduring benefit was carried out of said expenses incurred by assessee was to be allowed as business expenditure. There was no enhancement in the capacity of Plant and Machinery or increase in the efficiency and no new equipment was purchased, since no enduring benefit was created by the assessee out of the said expenses. The same was revenue expenditure and was allowed. – Dy. CIT vs. Kalyanpur Cement Ltd. 65 ITD 637 (Kol.)

Expenditure incurred was only to preserve and maintain the existing asset without any enduring advantage, same could not be treated as capital expenditure

In this case, the assessee was engaged in power generation, incurred expenditure towards replacement or various components in boilers and BWE and claimed as revenue expenditure.

Assessing Officer held expenses to be capital in nature on the ground that they were incurred after expiry of life span of machinery giving the assessee an enduring advantage. There was a clear finding in order of assessment, first option was to install a new plant which would have cost ₹ 4.5 crore per MW with a longer gestation period and second option was to go in for life extension programme at a cost of ₹ 0.44 crore per MW with a shorter gestation period. The assessee had gone for a cheaper option.

Madras High Court held that the expenditure incurred was only to preserve and maintain existing assets without any enduring advantage, therefore, same could not be treated as capital expenditure.

The matter came up before the Tribunal on the issue whether reinsurance or a prohibited business for insurance companies.

The issue had been remanded by the Tribunal to the AO for fresh consideration. The Hon’ble Madras High Court held that on admitted facts that materials produced were not new and the applicability of amended provisions did not require further probing of facts. The Order of the remand was not justified.

The High Court found that the remand was unjustified in Cholamandalam General Insurance Co. vs. Assistant / Dy. CIT 357 ITR 597 (Mad.) and the matter was remanded back to the Tribunal while pointing out that the Income Tax by amendments with effect from 1st April, 1961 permitted reinsurance and recognized by the regulatory and development authority and accordingly decision of Tribunal in the DCIT vs. Cholamandalam Insurance General Insurance Co. Ltd. [2018] 12 ITR Tribunal OL 540 (Chennai) was set aside – Cholamandalam Insurance Co. Ltd. vs. Dy. CIT LTU, 411 ITR 386 (Mad.)

Prior Period Expenses

Assessment of income of prior period – Section 37

There was a controversy as to the deductibility of prior period expenses claimed during the year.

As long as the expenses were incurred during the year, there can be no further question as to whether the transaction concerned had taken place during the year. There was no burden on the assessee to demonstrate that certain expenses, where it is incurred during the year also relates to the same year, as long as the liability has been incurred during the year, following the reasoning not only in Circular No. 621, 195 ITR (ST) 154, but also in CIT vs. Shri Ram Honda Power Equipment 289 ITR 475 (Delhi)CIT vs. Exon Mobile Lubricants Pvt. Ltd. 328 ITR 17 Delhi & CIT vs. Excel Industries Ltd. 358 ITR 295 (SC). The said prior period expenditure was allowed – Principal CIT vs. Dishman Pharmaceuticals & Chemicals Ltd. [2019] 417 ITR 373 (Guj)

Section 37(1) – Business Expenditure

Capital or Revenue – Assessee wrongly entered the amount as capital in nature in the books – But in its return of income, rightly claimed it as revenue expenditure – Merely because a different treatment was given in books of account could not be a factor which would deprive the assessee from claiming entire expenditure as a revenue expenditure.

The assessee company was engaged in the business of organised retail. Its main business was sourcing and selling fruits, vegetables, food articles, groceries, fast moving goods and other goods of daily use and provisions of various related services as a neighbourhood convenience store. However, in order to expand business, the assessee was setting up new stores. In its return of income, the expenditure incurred for setting up new stores had been claimed as revenue expenditure to the extent the expenditure was revenue in nature and where capital expenditure was incurred, the same was not claimed as revenue expenditure. However, the assessee in its books of account showed the entire expenditure, i.e., even the expenditure which was claimed in the income tax return as revenue expenditure, as capital expenditure. The AO disallowed the same on the ground that the assessee had itself capitalised the same under the head ‘Project Development Expenditure’.

The CIT(A) held that since the assessee himself had claimed that these expenses pertained to a project which had not been implemented, therefore, it could not be allowed as revenue expenditure and confirmed the order of the AO.

Being aggrieved with this order, the assessee filed an appeal before the Tribunal. The Tribunal held that all the expenses were purely revenue in nature. None of the expenses pertained to acquisition of any capital asset. It was also well settled law that ‘normally’, the manner of accounting shall not determine the taxability of income or allowability of any expenditure. The taxability of income and allowability of an expense shall be determined on the basis of the provisions of the income-tax law as contained in the Income-tax Act, 1961 and as explained by various courts from time-to-time. It was further noticed that nothing had been brought out by the lower authorities to show that any of these expenses were capital in nature, except the fact that the assessee had debited the same under the head ‘Project Development Expenditure’. The assessment of the return had to be made on the basis of the return filed by the assessee supported with accounts. While examining the accounts, the return could not be ignored. The return had to take precedence over the accounts in respect of legal claims. The accounts had to be seen only to verify the facts. The admissibility of a claim or otherwise should be primarily and predominantly on the basis of claims made by the assessee in the return of income, unless the assessee claimed otherwise subsequently during the course of assessment proceedings.

These expenses were revenue in nature and should be allowed as such. There was no estoppel against the statute and the Act enabled and entitled the assessee to claim the entire expenditure in the manner it could be claimed under the law.

Being aggrieved with the order of the ITAT, the Revenue field an appeal before High Court. The High Court relied on the case of Reliance Footprint Ltd. being Income Tax Appeal No. 948/2014. The Court had, vide order dated 5th July, 2017, dismissed the above appeal filed by the Revenue on an identical question as framed herein. Revenue agreed with the position that the decision of the Court in Reliance Footprint Ltd. (Supra) would cover the issue arising herein. In the above view, the appeal was, therefore, dismissed. – Reliance Fresh Limited vs. ACIT 7(2), ITA No. 1661/Mum/2013, A.Y. 2008-09

Business Expenditure

Agreement with the State Government to construct houses for poor people affected by floods:

In this case, assessee was carrying on the business of iron ore and also trading in iron ore. Thus, day in and day out the assessee would be approaching the appropriate Government and its authorities for grant of permits, licences and as such the assessee in its wisdom and as a prudent business decision had entered into a memorandum of understanding with the Government of Karnataka and incurred the expenditure towards construction of houses for the needy persons, not only as a social responsibility but also keeping in mind the goodwill and benefit it would yield in the long run in earning profit which was the ultimate object of conducting business and as such, expenditure incurred by the assessee would be in the realm of “business expenditure”. The amounts were deductible – Kanhaiyalal Dudheria vs. Joint Commissioner of Income-tax & Anr. [2019] 418 ITR (Karn.), 310 CTR 617 (Karn.)

Business Expenditure – Capital or Revenue Expenditure

The assessee was in the business of developing, maintaining and operating bus queue shelters, metro stations and highways. It had entered into a concessionaire agreement with the Delhi Transport Corporation for setting up 400 bus shelters on build, operate and transfer basis. The assessee was to construct, operate and maintain the shelters for ten years, after which the shelters were to be handed over to the Corporation. According to the agreement the assessee had to pay the Corporation ₹ 4.09 crore per month. In return, the assessee was free to earn revenue through advertising to be displayed on the bus shelters. The assessee was also required to furnish two bank guarantees of ₹ 1.00 crore and ₹ 1.5 crore to the Corporation as performance security for construction and for operation and maintenance of the bus shelters and payment of concessionaire fee respectively. When the Corporation invoked the bank guarantee, the assessee approached the Delhi High Court which passed a restraint order against encashment. However, the stay order was vacated and the Corporation was permitted to encash the bank guarantee. As the assessee had obtained stay, it was directed to pay interest at the rate of 9% per annum till the date of payment. For the assessment year 2009-10, the Assessing Officer disallowed a sum of ₹ 2,08,92,603/- claimed as capital loss suffered by the assessee for failure to perform its part of the concessionaire agreement with the Corporation and the interest on late payment as capital expenditure and not revenue expenditure. The disallowance was upheld by the Commissioner (Appeals). The Tribunal reversed the findings and held that the addition was not justified as it was a revenue expenditure – [2019] 417 ITR 162 (Delhi) Principal Commr. of Income-tax vs. Green Delhi BQS Ltd.

Business Expenditure

Section 37(1) of Income-tax Act, 1961 – Where assessee company, engaged in business of construction and sale of residential and commercial building complexes, sold a building which was under construction at time of sale and incurred expenditure for completing its construction during financial year subsequent to sale of building, such expenditure was liable for deduction under Section 37(1).

The Commissioner (Appeals) held that in a situation where at the time of assessment the building remains incomplete, estimated future expenditure to be incurred was also considered along with the expenditure already incurred and was taken as cost relatable to the total saleable area, i.e., saleable area already built and the saleable area to be built in future, for arriving at the estimated cost of construction per square foot (sq.ft.). Therefore, the contentions of the assessee were accepted and it was held that the AO was not justified in not taking the value of building work-in-progress during the financial years 2009-10 and 2010-11 for working out the cost per square feet. It was directed that the cost per square feet would be taken as total expenditure incurred in construction, divided by the total saleable area, for the purpose of working out the profit from the sale of commercial area. The Tribunal upheld the decision of the Commissioner (Appeals).

The Revenue filed an appeal before the High Court and contended that the claim for deduction of future expenses made by the assessee could not be allowed. It contended that there was a distinction between the amount spent to pay off an actual liability that would be incurred in future which was only contingent. It was contended that the former was deductible but not the latter.

The Kerala High Court upheld the decision of the Tribunal and held as under:

(i) The dispute raised by the Revenue is only with regard to the deduction claimed by the assessee in respect of the expenses incurred in future, that is, after the sale of the building, during the subsequent financial years and not in respect of the expenses incurred by it during the relevant financial year. Section 37 is a residuary section for allowability of business expenditure.

(ii) The expression ‘profits and gains” has to be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipts is deducted therefrom – whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date. The profit of a trade or business is the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning those receipts. It is the meaning of the word ‘profits’ in relation to any trade or business. Whether there be such a thing as profit or gain can only be ascertained by setting against the receipts the expenditure or obligations to which they have given rise.

(iii) ‘Expenditure’ is not necessarily confined to the money which has been actually paid out and it covers a liability which has accrued or which has been incurred although it may have to be discharged at a future date. However, a contingent liability which may have to be discharged in future cannot be considered as expenditure. It also covers a liability which the assessee has incurred in praesenti although it is payable in futuro.

(iv) In order to claim deduction of business expenditure, it is not necessary that the amount has been actually paid or expended during the relevant accounting year itself and it is sufficient that the liability for payment had incurred or accrued during the relevant accounting year and the actual payment of amount or discharge of liability may occur in future and what is crucial is the accrual of liability for payment or expenditure during the relevant accounting year. But a contingent liability that may arise in future cannot be treated as expenditure. Thus, the substantial question of law is answered in favour of the assessee and against the revenue – CIT vs. Oberon Edifices & Estates (P) Ltd. [2019] 110 taxmann.com 305 (Ker.) dated 5th September, 2019

Of late, there have been many instances where the Supreme Court has dismissed SLPs filed by the Applicant [Assessee or Department] against judgement of various High Courts. Some of the judgements of such High Courts have universal and far reaching implications, as the ratios thereof may sought to be applied to the cases of many other assessees on the ground that the ratios have been approved by the Apex Court. Some of the examples are cases concerning bogus purchase, penny stock, share premium received from shareholders, etc.; the latest being the dismissal of the SLP by the Supreme Court in the case of Suman Poddar v. ITO – (2019) 112 taxmann.com 330 (SC), a case involving the issue of penny stock. A case of an assessee may be situated in a State different then the State under the jurisdiction of that particular High Court which rendered the judgement and there may not be any such judgement rendered by the jurisdictional High Court in the assessee’s case. Further, the fact situation of the assessee may be little different / distinguishable from the facts involved in the case before the High Court.

An issue, therefore, arises as to the precedent value of such judgment of the High Court against which the SLP is dismissed by the Supreme Court. In other words, that issue is: How far the ratios of such judgements are binding on the High Courts of other States and the Tribunals situated in other states. An attempt is made in this article to understand and analyse such a situation.



The law regarding binding effect of such dismissal is too well-settled. In a nutshell, such dismissal has no binding force in terms of Article 141 of the Constitution of India. Consequently, it has no binding precedent value, in contradiction with a reasoned order of the Apex Court or an order passed in appeal. Reference, in this regard, can be made to the very well-known decision of the Supreme Court in the case of Kunhayammed v. State of Kerala – [(2000) 245 ITR 360 (SC)], which decision has been approved recently by a Three Judge Bench of the Supreme Court in the case of Khoday Distilleries Ltd. v. Mahadeshwara Sahakara Sakkare Karkhane Ltd. – [(2019) 104 taxmann.com 25 (SC)]. For ready reference, some of the relevant extracts of the later judgement are reproduced herein below:

20. Exercise of jurisdiction under Article 136 and the manner in which it is dealt with is clarified as under:

14. The exercise of jurisdiction conferred on this Court by Article 136 of the Constitution consists of two steps:
(i) granting special leave to appeal; and (ii) hearing the appeal……….”

21. The Court thereafter analysed number of cases where orders of different nature were passed and dealt with these judgments by classifying them in the following categories:

(i) Dismissal at the stage of special leave petition – without reasons – no res judicata, no merger Workmen of Cochin Port Trust v. Board of Trustees of the Cochin Port Trust [1978] 3 SCC 119, Western India Match Co. Ltd. v. Industrial Tribunal AIR 1958 Mad. 398, Indian Oil Corpn. Ltd. v. State of Bihar [1986] 4 SCC 146, Rup Diamonds v. Union of India 1989 taxmann.com 633 (SC), Wilson v. Colchester Justices [1985] 2 All ER 97 (HL), Supreme Court Employees Welfare Assn. v. Union of India [1989] 4 SCC 187, Yogendra Narayan Chowdhury v. Union of India [1996] 7 SCC 1, V. M. Salgaocar & Bros. (P.) Ltd. v. CIT [2000] 110 Taxman 67 (SC), Sree Narayana Dharamasanghom Trust v. Swami Prakasananda [1997] 6 SCC 78, State of Maharashtra v. Prabhakar Bhikaji Ingle [1996] 3 SCC 463.

(ii) Dismissal of the special leave petition by speaking or reasoned order – no merger, but rule of discipline and Article 141 attracted Penu Balakrishna Iyer v. Ariya M. Ramaswami Iyer AIR 1965 SC 195, Shankar Ramchandra Abhyankar v. Krishnaji Dattatreya Bapat [1969] 2 SCC 74, Sushil Kumar Sen v. State of Bihar [1975] 1 SCC 774, Gopabandhu Biswal v. Krishna Chandra Mohanty [1998] 4 SCC 447, Junior Telecom Officer Forum v. Union of India 1993 Supp. (4) SCC 693.

(iii) Leave granted – dismissal without reasons – merger results Thungabhadra Industries Ltd. v. Govt. of A.P. AIR 1964 SC 1372.


24. After elaborate discourse on almost all the aspects, the Court gave its conclusions and also summed up the legal position from paragraphs 39 to 44. We reproduce the same hereunder:


40. A petition seeking grant of special leave to appeal may be rejected for several reasons. For example, it may be rejected (i) as barred by time, or (ii) being a defective presentation, (iii) the petitioner having no locus standi to file the petition, (iv) the conduct of the petitioner disentitling him to any indulgence by the court, (iv) the question raised by the petitioner for consideration by this Court being not fit for consideration or deserving being dealt with by the Apex Court of the country and so on. The expression often employed by this Court while disposing of such petitions are — “heard and dismissed”, “dismissed”, “dismissed as barred by time” and so on. May be that at the admission stage itself the opposite party appears on caveat or on notice and offers contest to the maintainability of the petition. The Court may apply its mind to the meritworthiness of the petitioner’s prayer seeking leave to file an appeal and having formed an opinion may say “dismissed on merits”. Such an order may be passed even ex parte, that is, in the absence of the opposite party. In any case, the dismissal would remain a dismissal by a non-speaking order where no reasons have been assigned and no law has been declared by the Supreme Court. The dismissal is not of the appeal but of the special leave petition. Even if the merits have been gone into, they are the merits of the special leave petition only. In our opinion neither doctrine of merger nor Article 141 of the Constitution is attracted to such an order. Grounds entitling exercise of review jurisdiction conferred by Order 47 Rule 1 CPC or any other statutory provision or allowing review of an order passed in exercise of writ or supervisory jurisdiction of the High Court (where also the principles underlying or emerging from Order 47 Rule 1 CPC act as guidelines) are not necessarily the same on which this Court exercises discretion to grant or not to grant special leave to appeal while disposing of a petition for the purpose. Mere rejection of a special leave petition does not take away the jurisdiction of the court, tribunal or forum whose order forms the subject-matter of petition for special leave to review its own order if grounds for exercise of review jurisdiction are shown to exist. Where the order rejecting an SLP is a speaking order, that is, where reasons have been assigned by this Court for rejecting the petition for special leave and are stated in the order still the order remains the one rejecting prayer for the grant of leave to appeal. The petitioner has been turned away at the threshold without having been allowed to enter in the appellate jurisdiction of this Court. Here also the doctrine of merger would not apply. But the law stated or declared by this Court in its order shall attract applicability of Article 141 of the Constitution. The reasons assigned by this Court in its order expressing its adjudication (expressly or by necessary implication) on point of fact or law shall take away the jurisdiction of any other court, tribunal or authority to express any opinion in conflict with or in departure from the view taken by this Court because permitting to do so would be subversive of judicial discipline and an affront to the order of this Court. However this would be so not by reference to the doctrine of merger.


27. From a cumulative reading of the various judgments, we sum up the legal position as under:

(a) The conclusions rendered by the three Judge Bench of this Court in Kunhayammed and summed up in paragraph 44 are affirmed and reiterated.

(b) We reiterate the conclusions relevant for these cases as under:

(iv) An order refusing special leave to appeal may be a non-speaking order or a speaking one. In either case it does not attract the doctrine of merger. An order refusing special leave to appeal does not stand substituted in place of the order under challenge. All that it means is that the Court was not inclined to exercise its discretion so as to allow the appeal being filed.

(v) If the order refusing leave to appeal is a speaking order, i.e., gives reasons for refusing the grant of leave, then the order has two implications. Firstly, the statement of law contained in the order is a declaration of law by the Supreme Court within the meaning of Article 141 of the Constitution. Secondly, other than the declaration of law, whatever is stated in the order are the findings recorded by the Supreme Court which would bind the parties thereto and also the court, tribunal or authority in any proceedings subsequent thereto by way of judicial discipline, the Supreme Court being the Apex Court of the country. But, this does not amount to saying that the order of the court, tribunal or authority below has stood merged in the order of the Supreme Court rejecting the special leave petition or that the order of the Supreme Court is the only order binding as res judicata in subsequent proceedings between the parties.

(vi) Once leave to appeal has been granted and appellate jurisdiction of Supreme Court has been invoked the order passed in appeal would attract the doctrine of merger; the order may be of reversal, modification or merely affirmation.

(vii) On an appeal having been preferred or a petition seeking leave to appeal having been converted into an appeal before the Supreme Court the jurisdiction of High Court to entertain a review petition is lost thereafter as provided by sub-rule (1) of Rule 1 of Order 47 CPC.”


More recently, the Supreme Court in the case of State of Orissa and Another v. Dhirendra Sundar Das And Others – [(2019) 6 SCC 270 (SC)] has clarified this position with the following observations at Para 9.27:

9.27 It is a well settled principle of law emerging from a catena of decisions of this Court, including Supreme Court Employees’ Welfare Association v. Union of India & Anr. and State of Punjab v. Davinder Pal Singh Bhullar, that the dismissal of a S.L.P. in limine simply implies that the case before this Court was not considered worthy of examination for a reason, which may be other than the merits of the case. Such in limine dismissal at the threshold without giving any detailed reasons, does not constitute any declaration of law or a binding precedent under Article 141 of the Constitution.”

One of the latest decisions of the Apex Court is the case of P. Singaravelan & Ors. v. The District Collector – [Civil Appeal Nos. 9533 to 9537 of 2019, Order Dated 18-12-2019].


A judgement rendered by the Apex Court has the highest precedent value and is binding on all subordinate courts, under Article 141 of Constitution of India. However, and at the same time, it is equally a well-settled position on the law of precedent that a ruling of a court is to be read, understood and interpreted in the context of not only the issue that was under adjudication but also in the context of the points of arguments canvassed by both the sides. Though there is plethora of judicial precedents on this aspect, it will suffice here to refer the judgment of the Apex Court in the case of CIT v. Sun Engineering Works (P) Ltd. – [(1992) 198 ITR 297 (SC)], rendered in the context of Income-tax Act, 1961. The following extract of the judgment is self-explanatory and illuminating:

It is neither desirable nor permissible to pick out a word or sentence from the judgment of this court, divorced from the context the question under consideration and treat it to be the complete law declared by this court. ….”.

Corollary to the above principle is the principle that while appreciating precedent value of a decision, it may also be relevant to ascertain whether the decision is rendered per incuriam or is passed sub silentio. In the case of UOI & Ors. v. Dhanwanti Devi & Ors. – [(1996) 6 SCC 44], the Apex Court, while dealing with this aspect, observed as under:

9. …….What is of the essence in a decision is its ratio and not every observation found therein nor what logically follows from the various observations made in the judgement. Every judgment must be read as applicable to the particular facts proved, since the generality of the expressions which may be found there is not intended to be exposition of the whole law, but governed and qualified by the particular facts of the case in which such expressions are to be found.

10. Therefore, in order to understand and appreciate the binding force of a decision is always necessary to see what were the facts in the case in which the decision was given and what was the point which had to be decided. No judgment can be read as if it is a statute. A word or a clause or a sentence in the judgment cannot be regarded as a full exposition of law. Law cannot afford to be static and therefore, Judges are to employ an intelligent interpretation in the use of precedents………” {Emphasis supplied}

Similarly, in the case of Municipal Corporation of Delhi v. Gurnam Kaur – [(1989) 1 SCC 101], the Apex Court observed as under:

Precedents sub silentio and without argument are of no moment……… The weight accorded to dicta varies with the type of dictum. Mere casual expressions carry no weight at all. Not every passing expression of a Judge, however eminent, can be treated as an ex cathedra statement, having the weight of authority.”

In fact, the Supreme Court in the case of Gangadhar Behera and Ors. v. State of Orissa – [(2002) 8 SCC 381], made this aspect very clear with the observation at Para 28 therein, which are reproduced herein for ready reference:

So far as the observations made in Kamaksha Rai case are concerned, it is to be noted that the decision in the said case was rendered in a different factual scenario altogether. There is always peril in treating the words of a judgement as though they are words in a legislative enactment, and it is to be remembered that judicial utterances are made in the setting of the facts of a particular case. Circumstantial flexibility, one additional or different fact may make a world of differencebetween conclusions in two cases {see Padma Sundara Rao v. State of T.N. – [(2002) 3 SCC 533]}.” {Emphasis supplied}

Similarly, in the case of Haryana Financial Corporation & Anr. v. Jagdamba Oil Mills & Ors. – [(2002) 3 SCC 496], the Apex Court has observed as under:

19. Court should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. Observations of courts are not to be read as Euclid’s theorems nor as provisions of the statute.


21. Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases. Disposal of cases by blindly placing reliance on a decision is not proper.

22. The following words of Hidayatullah, J. in the matter of applying precedents have become locus classicus: (Abdul Kayoom v. CIT, AIR p. 688, para 19)

19. …Each case depends on its own facts and a close similarity between one case and another is not enough because even a single significant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation to decide cases (as said by Cardozo) by matching the colour of one case against the colour of another. To decide, therefore, on which side of the line a case falls, the broad resemblance to another case is not at all decisive.”


Similar observations are made by the Apex Court in the case of UOI v. Amrit Lal Manchanda & Anr. – [(2004) 3 SCC 75], as under [Para 15]:

Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed.”

Refer also the following observation of the Supreme Court in the case of S. V. Kondaskar, Official Liquidator & Liquidator of the Colaba Land & Mills Co. Ltd. v. V. M. Deshpande, ITO – [(1972) 83 ITR 685 (SC)]:

In order to understand and appreciate the binding force of a decision it is always necessary to see what were the facts of the case in which the decision was given and what was the point which had to be decided.”

A useful reference can also be made, among other, of the Kerala High Court in the case of CIT v. K. Ramakrishnan – [(1993) 202 ITR 997 (Ker)], in which the Court also analysed the legal principles on the aspect of Law of Precedent and held thus:

It is uncontrovertible that neither of these decisions directly covers the point in question before us, nor do they touch the matter even incidentally. In making their submissions as they have done, we are afraid, counsel are attempting to do what Lord Denning LJ. of the Court of Appeal in England cautioned against in his judgment in Paisner v. Goodrich [1955] 2 QB 353, 358; [1955] 2 All ER 330, 332 (CA):

“When the judges of this court give a decision on the intepretation of an Act of Parliament, the decision itself is binding on them and their successors (see Cull v. Inland Revenue Commissioners [1940] AC 51 (HL), Morelle Ltd. v. Wakeling [1955] 1 All ER 708; 2 WLR 672 (CA), but the words which the judges use in giving the decision are not binding. This is often a very fine distinction, because the decision can only be expressed in words. Nevertheless, it is a real distinction which will best be appreciated by remembering that, when interpreting a statute, the sole function of the court is to apply the words of the statute to a given situation. Once a decision has been reached on that situation, the Doctrine of Precedent requires us to apply the statute in the same way in any similar situation; but not in a different situation. Whenever a new situation emerges, not covered by previous decisions, the courts must be governed by the statute and not by the words of the judges. As Lord Porter has pointed out: ‘each case must be brought back to the test of the statutory words’ (see, his address to the Holdsworth Law Club on case-law in the Interpretation of Statutes, page 18). If a point should be reached where the words of the judges lead to a different result from the words of the statute, then the statute must prevail; because the judges have no right to supplant the words of the statute and would not wish to do so.”

The words used by judges in their judgments are not to be read as if they are words in an Act of Parliament. (See the judgment of Lord Reid in the appeal from the above decision — Goodrich v. Paisner [1957] AC 65 (HL) at page 88). We have to remember that the words in a judgment are not used after weighing the pros and cons of all conceivable situations that may arise. They constitute just the reasoning of the judges in the particular case, tailored to a given set of facts and circumstances. What is made relevant and binding is only the ratio decidendi and no more. The careful drafting— perhaps with reference to analogous statutes—the multiple reading in the Legislature and the discussion which go behind the making of a statute inject a certain degree of sanctity and definiteness of meaning to the words used by the Legislature. The same cannot be said of a judgment which deals only with the particular fact situation on hand. It will be too much to ascribe and read precise meaning to words in a precedent which the judges who wrote them may not have had in mind at all. Equally, it is not possible to impute an intent to render a decision on a point which was not before them and which they never intended to deal with, even though such an inference may seem to flow logically from the ratio decidendi of the case. That was why it was stated by Lord Halsbury LC in Quinn v. Leathern [1901] AC 495 (HL), at page 506:

“. . . . there are two observations of a general character which I wish to make, and one is to repeat what I have very often said before, that every judgment must be read as applicable to the particular facts proved, or assumed to be proved, since the generality of the expressions which may be found there are not intended to be expositions of the whole law, but governed and qualified by the particular facts of the case in which such expressions are to be found. The other is that a case is only an authority for what it actually decides. I entirely deny that it can be quoted for a proposition that may seem to follow logically from it. Such a mode of reasoning assumes that the law is necessarily a logical code, whereas every lawyer must acknowledge that the law is not always logical at all.”

A case is thus a precedent, and binding for what it explicitly decides and no more. It would be too much to imply and read into its propositions what may seem to flow even incidentally or logically from it —precisely what Sabyasachi Mukharji J., stated in Goodyear India Ltd. v. State of Haryana [1991] 188 ITR 402, 424; AIR 1990 SC 781, 793:

“…. a precedent is an authority only for what it actually decides and not for what may remotely or even logically follow from it.”

Bes C.J., had echoed these sentiments as early as in 1826 in Fletcher v. Lord Sondes (3 Bing 501 at 569; 130 English Reports 606, at page 633) in the following words:

“Although the courts below will not impugn your Lordships’ judgments in cases ad idem, yet they do not hold that they are bound by them beyond the point actually decided. The courts below truly say, we cannot know that the House of Lords would carry this determination farther than they have carried it.””


It is a well-settled position that a judgement of non-jurisdictional High Court is not binding on the Tribunal, especially when there are contrary decisions of other High Courts and Tribunal. Reference, in this regard, can be made to the decision of the Bombay High Court in the case of CIT v. Thane Electricity Supply Ltd. – [(1994) 206 ITR 727 (Bom)] and the observations of the Mumbai Tribunal, in this regard, in the case of ACIT v. Pahilajrai Jaikishin – [(2016) 157 ITD 1187 (Mum-Trib.)] to the following effect:

“………We are also fully aware that law declared by Hon’ble Supreme Court is binding on all courts within the territory of India under Article 141 of Constitution of India which is binding on us and we are bound to follow the same. In the case of CIT v. Smt. Godavari Saraf [1978] 113 ITR 589 (Bom.), the Bombay High Court held that the Judgment of non-Jurisdictional High Court was binding on the Tribunal if there were no contrary judgments. The above Judgment runs contrary to Article 141 of the Constitution as per which only the Supreme Court’s Judgments are binding on all Courts within India. The Bombay High Court in the case of CIT v. Thane Electricity Supply Ltd. [1994] 206 ITR 727 overruled the Judgment in the above case of Godavari Saraf (supra) holding that the decision of one High Court was not a binding precedent for another High Court or Lower Courts outside the jurisdiction.”