Madras High Court
Commissioner Of Income Tax vs Y.Jagan Mohan on 30 September, 2024
Author: Anita Sumanth
Bench: Anita Sumanth
2024:MHC:3732
IN THE HIGH COURT OF JUDICATURE AT MADRAS
Dated: 30.09.2024
CORAM
THE HONOURABLE DR. JUSTICE ANITA SUMANTH
and
THE HONOURABLE MR. JUSTICE G.ARUL MURUGAN
T.C.A.No.1114 of 2010
Commissioner of Income Tax
Chennai. .... Appellant
Vs
Y.Jagan Mohan ... Respondent
PRAYER : APPEAL filed under Section 260 A of the Income Tax Act,
1961 against order dated 26.03.2010 passed in I.T.A.No.199/mds/09 for the
Assessment Year 2004-05 on the file of the Income Tax Appellate Tribunal
Madras 'A' Bench, Chennai.
For Petitioner : Ms.V.Pushpa
Senior Standing Counsel
For Respondent : Mr.R.Sivaraman
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J U D G M EN T
(Judgment of the Court was delivered by Dr.ANITA SUMANTH,J.)
The Commissioner of Income Tax has filed the present Tax Case
(Appeal) challenging the order of the Income Tax Appellate Tribunal (in
short ‘ITAT’/’Tribunal’) relating to the assessment year (AY) 2004-05
confirming order dated 27.01.2009 passed under Section 263 of the Income
Tax Act, 1961 (in short ‘Act’) revising the order of assessment dated
29.12.2006 passed under Section 143(3) of the Act.
2. The respondent/assessee had filed a return of income within the
time provided under the Statute. After an intimation was issued under
Section 143(1), the return was selected for scrutiny and notices under
Sections 143(2) and 142(1) had followed. An order of assessment had been
passed on 29.12.2006 after hearing the authorised representative of the
assessee. Though brief, the assessing authority notes inter alia the claim of
the assessee of short term capital loss and the verification carried out in that
regard, that culminated in a minor addition.
3. The assessment order also contains a note making reference to an
agreement between the seller and the purchaser that the seller/its affiliates
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shall not indulge in certain activities without the express prior written
approval of the purchaser. The assessing authority states that subject to
approval being granted by his superiors, the assessment for previous
assessment year i.e., A.Y.2003-04 will be reopened for consideration of
certain additions.
4. On perusal of the assessment records, the Commissioner of Income
Tax (CIT) was of the view that the assessment was erroneous and
prejudicial to the interests of the revenue and hence issued a show cause
notice dated 24.09.2008 invoking the provisions of Section 263 of the Act.
The proposal contained in the show cause notice dated 24.09.2008 for
revision of assessment was based on the following aspects:
1. The agreed rental income of Rs.75,000/- was omitted to be
assessed.
2. The claim of Rs.45 lakhs as consultancy charges paid to M/s
Earnst and Young against the capital gains shown at Rs.12.50
Crores, is not allowable as the expenses are not wholly and
exclusively incurred in connection with transfer.
3. Deduction u/s 54 EC being alleged investments in NABARD
and REC Bonds by the assessee for Rs.7 Crores is not
allowable as the investments are before the date of transfer.
5. The assessee filed a detailed reply on 14.10.2008 pointing out that
there was no error committed by the assessing authority in passing of order
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dated 29.12.2006 and as such, the proposals contained the notice,
particularly points 1 and 2, as exacted above, would not stand the scrutiny of
the test under Section 263 of the Act.
6. On the third issue relating to exemption under Section 54EC of the
Act, the assessee explained that the claim was on the basis that the
investments had been made subsequent to the date of transfer and the
assessing authority had examined the claim in detail at the time of
assessment. The assessee hence sought clarity on the date of transfer per the
assessment records in order that it may furnish additional submissions.
7. A clarification appears to have been furnished by the CIT on
10.11.2008 to the effect that the date of completion of transfer as per the
departmental records was 16.12.2003. Based on the same, the assessee
furnished additional submissions on 19.11.2008. The explanation tendered
was that the agreement to sell the business of Mova Consultants Private
Limited (Company) and all related assets had been entered into on
02.01.2003 (sale agreement) with Orchid Chemicals and Pharmaceuticals
Limited.
8. The vendors were the company, the assessee, who was a Director in
that company and Sali Health Care Private Limited. The sale agreement
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provides for 120 days for completion of all transfer related formalities and
hence the parties covenanted that the transfer would be completed on
30.04.2003. They were unable to complete the transfer as agreed upon and
the date was extended to 16.12.2003 on which date the transfer was
completed in full.
9. In the meanwhile, since the transfer qua the parties has been
finalised as early as on 02.01.2003, the assessee invested the advances
received, in the bonds issued by NABARD and REC. He had been advised
that such investment was supported by a Circular of the CBDT No.359 dated
10.05.1983 and the decisions of the ITAT. Overriding the explanations
tendered, the CIT passed an order dated 27.01.2009, adverse to the
respondent.
10. He proceeded on the basis that the investments in bonds had been
made prior to the date of transfer and since the source of investments was
from redemption of certain securities and not the advances received in
connection with transfer, it was not entitled to exemption under Section
54EC. He distinguished the Circular that had been relied upon stating that
that Circular had been issued in the context of Section 54E and not Section
54EC.
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11. In addition, he stated that even assuming that the said Circular was
applicable the fact remained that the investment had been made out of
redemption of certain other securities and not out of the earnest money or
advances in relation to the transfer. The Commissioner was thus of the view
that the assessee had not established a nexus between the amounts invested
in the bonds and the advances, particularly since the balance in the bank
account immediately preceding the credit of the redemption from securities
was only Rs.1,94,801/-. A direction was thus given to withdraw the
deduction that had been granted under Section 54EC and enhancing the
assessment to that extent.
12.The assessee as well as Nova Consultants, which had suffered a
similar order, challenged the order of the Commissioner of Income Tax
before the Income Tax Appellate Tribunal (‘Tribunal’/‘ITAT’). The
Tribunal noticed that the assessee was the Managing Director of one Mano
Pharmaceuticals now known as Nova Consulting Private Limited and held a
substantial interest in Sali Health Care as its Proprietor.
13.After a detailed consideration of the matter, the Tribunal confirmed
the position that the assessing officer had failed to apply his mind to the
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assessment in regard to the first two issues i.e. the rental income and the
consultancy charges paid to Ernst and Young confirmed the order of the CIT
to that extent. As regards the deduction under Section 54EC, the Tribunal
allowed the same.
14.Mrs.V.Pushpa, learned Senior Standing Counsel appearing for the
Revenue assails the order of the Tribunal, pointing out that the order of the
Tribunal is non-speaking and contains no discussion whatsoever as to the
basis on which the appeal has been allowed. She is right in this. In fact, the
order of the Tribunal, apart from being non-speaking, has not even noticed,
or adverted to the primary facts in coming to the conclusion that the
assessee's appeal must be partly allowed.
15.However, the year under consideration is 2004-05 and this tax case
(appeal) is of the year 2010. We are hence not inclined to send the matter
back to the Tribunal bearing in mind the elapse of time. On merits she
submits that the investment in bonds was even prior to the date of transfer
and hence the claim of the respondent for exemption was contrary to the
Act. Learned Standing Counsel has cited the following decisions in support
of her submissions:
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1.R.Krishnaswamy v. Commissioner of Income-tax, Co. Circle, Chennai1
2.Bhupendra Kumar Bhaumik v. Union of India2
16.Mr.R.Sivaraman, learned counsel appearing for the respondent
defends the order of the Tribunal, citing the following decisions:
1.Commissioner of Income-tax-II, Pune v. Subhash Vinayak Supnekar3
2.Mrs.Parveen P.Bharucha v. Deputy Commissioner of Income-tax, Circle
2, Pune4
3.Commissioner of Income-tax v. Sunbeam Auto Ltd.5
4.Commissioner of Income-tax v. Future Corporate Resources Ltd.6
5.Virtusa Consulting Services (P.) Ltd. v. Deputy Commissioner of Income
Tax, Chennai7
6.Malabar Industrial Co. Ltd. v. Commissioner of Income-tax8
7.Jeevan Investment & Finance (P.) Ltd. v. Commissioner of Income Tax,
City-1, Mumbai9
17.We have heard the rival contentions and had perused the case
records. The assessee had circulated a copy of the agreement of sale which is
part of the record and which is the subject matter of interpretation by the
authorities. The relevant clauses are as follows:
1.6 ‘Completion’ shall mean the completion of the sale and
purchase in accordance with Clause 5 of this Agreement.
1.7 ‘Completion Date’ shall mean the date on which the
1 [(2014) 43 taxmann.com 177 (Madras)]
2 [(2002) 125 Taxman 886 (Delhi)]
3 [(2017) 77 taxmann.com 226 (Bombay)]
4 [(2012) 28 taxmann.com 274 (Bom.)]
5 [(2010) 189 Taxman 436 (Delhi)]
6 [(2021) 132 taxmann.com 173 (Bombay)]
7 [(2021) 128 taxmann.com 22 (Madras)]
8 [(2000) 109 Taxman 66 (SC)]
9 [(2017) 88 taxmann.com 552 (Bombay)]
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Completion occurs, as specified in Clause 4.3(b) of this
Agreement, provided that such date shall be no later than 120
(one hundred twenty) days from the date of execution of this
Agreement unless further extended by the mutual consent of the
Parties in writing.”
1.18 ‘Escrow Agreement’ shall mean the Escrow Agreement to
be executed by and between the Parties and the Escrow Agent
at Chennai within 7 (seven) business days from the Date of the
Agreement in the form and manner set out and annexed hereto
as Schedule
18.Along with the agreement, the schedule of payments has also been
produced which is extracted below:
Schedule – L
Schedule for Payment of Purchase Price
Rs in Crores
Item Principal Conditions Precedent to Mode of Amount Amount Amount Total Amount
be fulfilled Payment Payable to Payable to Payable Payable to
Seller No.1 Seller No.2 to Seller Seller No.1,
No.3 No.2 and
No.3
Agreeme Execution of the Agreement Payment 10.00 0.50 3.50 14.00
nt to Sell to Sell and in addition, to Sellers
fulfillment of Conditions
Precedent 4.2(a) and 4.2(e)
IPRs Ensuring that applications Payment 3.50 3.50
for all IPRs required for to Sellers
Business are in order and
duly filed with appropriate
authorities and signing of
deeds of assignment for
transfer of all brands / trade
marks and other IPRs and
their filing with the Register
of Trademarks and
Merchandise and obtaining
due and proper
acknowledgment of the
Registrar of such filings.
More specifically, the
following Conditions
Precedent : 4.2(k), and
4.2(n)
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Drug i) Renewal and transfer of Payment 0.25 0.25 3.00 3.50
Licenses, all the Drug Licences of the to be
Third Sellers to the Purchaser. made to
Party ii) Renewal of Third Party the Sellers
Drug Drug Licences and Other on the
Licenses Product Licences and fulfillment
and continued operation of third of
Other party and other Principal
Product manufacturing Condition
Licences arrangements for the s
purchaser. Precedent
iii) Entering into of third to the sole
party manufacturing satisfactio
agreements by the Third n of the
Party Manufacturers with Purchaser
the Purchaser. More .
specifically, fulfillment the
following Conditions
Precedent : 4.2(d), 4.2(e),
4.2(f), 4.2(g), 4.2(h), 4.2(i),
4.2(j), 4.2(m)
Final Fulfillment of all the Payment 3.00 3.00
Payment Conditions Precedent and to be
fulfillment of all Further made to
Obligations Escrow
Account
with the
Escrow
Agent and
released
to the
Sellers on
the
fulfillment
of all the
Condition
s
Precedent
and
Further
Obligation
s to the
sole
satisfactio
n of the
Purchaser
and
released
to Sellers
upon the
expiry of 9
months
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from the
date of the
Agreement
to Sell.
Total 10.25 0.75 13.00 24.00
19.This schedule reveals clearly that the date of receipt of advances is
contemporaneous with the execution of the sale agreement that is dated
02.01.2003. The investments have been made only thereafter and hence it is
clear that the source for the investments are the advances received from the
purchasers. The respondent has also explained that the advances were
initially deposited in mutual funds and the maturity amounts had been
credited to its bank account from out of which the investment in bonds had
been made.
20. The mere fact that the advances had been deposited in mutual
funds would not, in our view, militate against the claim under Section 54EC
as the investments in bonds had been made from out of the proceeds of the
mutual funds. There is no dispute, rather it is admitted, that there were no
other funds available with the assessee from out of which the investment in
bonds could have been made. The nexus between the advances and the
amounts invested in bonds is clear, directly traceable to the advances
received.
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21.In light of this admitted position, we return a finding based on the
materials available on record that the source of the investment in bonds are
the advances that has been received by the assessee in relation to the subject
transaction. In fact, this aspect of the matter has not been lost sight of by the
assessing authority. Under notice dated 01.12.2006, the assessee has been
called upon to furnish various details prior to finalisation of assessments.
The notice reads thus:
In the statement of income filed along with the Return of
Income for the A.Y.2004-05 from Long Term Capital Gains
(LTCG) from sale of brands of Rs.12,50,00,000/-, you have
claimed exemption u/s 54EC of the following:-
1) Investments in NABARD Bonds - Rs.5 crores
2) Investments in REC Bonds - Rs.2 crores to arrive at a total of
7 crores and LTCG at Rs.5,50,00,000/-. While doing so, you
have deducted expenses incurred for sale of Rs.45 lakhs.
Kindly furnish evidence for having received proceeds towards
sale of brands at Rs.12,50,00,000/- and expenses for Rs.45
lakhs. You are requested to furnish the names and addresses of
the persons to whom the brands were sold and evidences for
expenses to the extent of Rs.45 lakhs.”
“In the balance sheet as on 31-3-04 under the head Loans and
others. It has been mentioned as follows:
In the P&L Account, you have shown a receipt of Rs.50 lakhs as
non compete fee. Kindly furnish evidence together with name
and address of the person from whom you have received this
money.
You have received interest from REC Bonds of Rs.4,51,506/-.
Please produce evidence.
Interest of Rs.2,93,441.40 has been received from Banks on FD.
Please furnish evidence.
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You have shown in the Profit and Loss account, sale of bonds to
IPR to the extent of Rs.12.50 crores. Kindly furnish evidence for
this and name and address of the person from whom you have
received this money. To prove this, you are requested to
produce bank statement for having received this sum.
Please furnish a copy of agreement entered into with M/s
Orchid Chemicals & Pharmaceuticals Ltd.”
22.A perusal of the above notice informs us that the claim of capital
gains has not escaped the attention of the assessing officer. Necessary
documents including the agreement have been called for and an explanation
has been sought from the assessee that has been duly tendered.
23.The next argument of the revenue is that Section 54EC requires the
investments to be made only subsequent to the date of transfer. In this
regard, the respondent has relied upon a Circular issued in the context of
Section 54E. The Circular reads thus:
CIRCULAR : NO. 359 [F.NO. 207/8/82-IT(A-II)]
SECTION 54F OF THE INCOME-TAX ACT, 1961 -
CAPITAL GAINS - EXEMPTION OF, IN CASE OF
INVESTMENT IN RESIDENTIAL HOUSE - ASSESSEE
INVESTING EARNEST MONEY IN SPECIFIED ASSETS
BEFORE DATE OF TRANSFER - WHETHER AMOUNT SO
INVESTED QUALIFIES FOR EXEMPTION
CIRCULAR : NO. 359 [F.NO. 207/8/82-IT(A-II)], DATED 10-
5-1983
1.Section 54E provides for exemption of long-term capital
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gains if the net consideration is invested by the assessee in
specified assets within a period of six months after the date of
such transfer. A technical interpretation of section 54E could
mean that the exemption from tax on capital gains would not be
available if part of the consideration is invested prior to the date
of execution of the sale deed as the investment cannot be
regarded as having been made within a period of six months
after the date of transfer.
2.On consideration of the matter in consultation with the
Ministry of Law, it is felt that the foregoing interpretation would
go against the purpose and spirit of the section. As the section
contemplates investment of the net consideration in specified
assets for a minimum period and as earnest money or advance is
a part of the sale consideration, the Board have decided that if the
assessee invests the earnest money or the advance received in
specified assets before the date of transfer of asset, the amount so
invested will qualify for exemption under section 54E.
24.The revenue argues that the Circular is inapplicable as it has been
rendered in reference to Section 54E and not 54EC. Hence, the provisions of
Section 54E and Section 54EC are extracted below:
54E. Capital gain on transfer of capital not to be assets
charged in certain cases.—(1) Where the capital gain arises
from the transfer of a long-term capital asset before the 1st
day of April, 1992], the capital asset so transferred being
hereafter in this section referred to as the original asset and
the assessee has, within a period of six months after the date of
such transfer, invested or deposited the whole or any part of
the net consideration] in any specified asset such specified
asset being hereafter in this section referred to as the new
asset, the capital gain shall be dealt with in accordance with
the following provisions of this section, that is to say,— (a) if
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the cost of the new asset is not less than the net consideration
in respect of the original asset, the whole of such capital gain
shall not be charged under section 45; (b) if the cost of the
new asset is less than the net consideration in respect of the
original asset, so much of the capital gain as bears to the
whole of the capital gain the same proportion as the cost of
acquisition of the new asset bears to the net consideration
shall not be charged under section 45:
54EC. Capital gain not to be charged on investment in
certain bonds.—(1) Where the capital gain arises from the
transfer of a long-term capital asset, being land or building or
both, the capital asset so transferred being hereafter in this
section referred to as the original asset and the assessee has,
at any time within a period of six months after the date of such
transfer, invested the whole or any part of capital gains in the
long-term specified asset, the capital gain shall be dealt with
in accordance with the following provisions of this section,
that is to say,— (a) if the cost of the long-term specified asset
is not less than the capital gain arising from the transfer of the
original asset, the whole of such capital gain shall not be
charged under section 45;
25.Section 54 and the provisions thereafter, from Section 54A to
Section 54 GB, provide for an exemption from the levy of capital gains in
various stipulated circumstances. Section 54E states that the capital gain
arising on the transfer of a capital asset prior to 01.04.1992, is not to be
charged in certain cases. Similarly, Section EA and EB, applicable in the
event of the transfer of a long-term capital asset before 01.04.2000, grants an
exempts from capital gain if the gain is invested in specified securities in the
manner provided under those sections.
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26.The exemption granted under Section 54EA and EB in respect of
transfers prior to 01.04.2000, has been continued by Section 54EC, and is
applicable to transfers post 01.04.2000. The scheme of capital gains
exemption is thus seen to have envisaged a seamless sequence, from Section
E dealing with transfers prior to 01.04.1992 to the present-day Section EC
applicable to transfers post 01.04.2000, without interruption. There are, by
and large, no major differences in the ingredients of the scheme itself.
Hence, in our considered view, there should be no differences in the
interpretation of those provisions, barring those areas where the provision
itself makes a patent distinction.
27.The Circular issued in the context of Section 54E is thus applicable
in the context of Section 54EC as well as the scheme of exemption under
erstwhile Section 54E continues in 54EC in one continuous progression.
28.The Bombay High Court in Commissioner of Income-tax-II, Pune
v. Subhash Vinayak Supnekar10 considered the substantial question of
whether an assessee was entitled to deduction under Section 54EC of the Act
when that assessee had not fulfilled the mandatory requirement of making
the investment within six months from the date of transfer.
10 (2017) 77 taxmann.com 226 (Bombay)
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29.In that case, the agreement to sale of a property was dated
21.02.2006 and the final sale took place on 05.04.2007. That assessee had
invested Rs.50,00,000/- from out of the advance received under the sale
agreement in REC bonds. The investment had been made on 02.02.2007.
The department rejected the claim for capital gains exemption on the ground
that the investment had been made anterior to the date of sale deed.
30.The High Court however reversed those orders applying the ratio
in Mrs.Parveen P.Bharucha v. Deputy Commissioner of Income-tax, Circle
2, Pune11 and CBDT Circular No.359 dated 10.05.1983. The assessee in that
case had relied on a decision of its co-ordinate bench in the case of Vhikulal
Chandak Hus v. ITO and the appeal of the revenue against that decision had
been dismissed by the Nagpur Bench by the Bombay High Court in Income
Tax Appeal No.68 of 2009 by an order dated 22.08.2010.
31.Mrs.Pushpa has relied on a decision of this Court in
R.Krishnaswamy's case. We find that the facts of that case are
distinguishable when compared with the present. The substantial questions
of law in that case were as follows:
“1. Whether in the facts and circumstance of the case,
the Appellate Tribunal was right in coming to the conclusion
11 348 ITR 325
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that even though the vacant possession of the property was
handed over only on 25.03.2004 the capital gains will arise
for the assessment year 2003-2004 and not for the assessment
year 2004-2005?
2. Whether in the facts and circumstances of the case
the Appellate Tribunal was right in coming to the conclusion
that the part of the sale consideration was received on
21.12.2002 hence the capital gains will arise only for the
assessment year 2003-2004 and not for the assessment year
2004-05?
3. Whether in the facts and circumstances of the case
the Appellate Tribunal was right in coming to the conclusion
that the sale consideration was received on 21.12.2002 and
the property was handed over on the same day even though
the possession of the property was handed over only on
25.03.2004?”
32.R.Krishnaswamy had entered into a sale agreement on 07.12.1999
and had received advance from the company. The remaining consideration
had been received on 21.12.2002 and the sale deeds had been registered on
various dates till 23.03.2004. Possession had been handed over to the
agreement holders on 25.03.2004 and construction had been completed in
October 2005. Completion certificate had been given by the CMDA on
12.06.2006.
33.R.Krishnaswamy claimed deduction under Section 54EC of the
Act on the basis that the entire sale consideration had been invested in
prescribed bonds. The issue had arose in that case was the year in which the
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claim would be admissible, whether 2003-04 or 2004-05 as the transactions
had straddled the financial years in relation to both the aforesaid years.
34.That was the substantial issue to be decided by the Court in
deciding which the Court has referred to Section 53A of the Transfer of
Property Act in relation to part performance, ultimately bifurcating the claim
of capital gains and apportioning the same towards two separate years. This
case does not come to the aid of the revenue as the issue that was decided by
the Bench in R.Krishnaswamy's case was different and the facts are also
entirely distinguishable. The Delhi High Court has, however, in the case of
Bhupendra Kumar Bhaumik v. Union of India12 considered a similar case
albeit in the context of Section 54E, holding in favour of the assessee.
35. The ratio of the judgment of the Supreme Court in the case of
Malabar Industrial Co. Ltd. (supra) would also fully support us in our
conclusion that there is no error in the order of the assessing officer
warranting intervention under Section 263 of the Act.
36. In light of the detailed discussion above, the substantial questions
of law are answered in favour of the respondent-assessee and against the
department. The Tax case (appeals) are dismissed.
12 259 ITR 58
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(A.S.M.,J) (G.A.M.,J)
30.09.2024
Index:Yes
Speaking order
Neutral Citation: Yes
sl/vs
To
The Income Tax Appellate Tribunal,
Madras 'A' Bench, Chennai.
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DR. ANITA SUMANTH,J.
and MR. G.ARUL MURUGAN,J.
sl/vs T.C.A.No.1114 of 2010 30.09.2024 Page 21 of 21 https://www.mhc.tn.gov.in/judis