PCIT (Central) Vs Pankaj Buildwell Ltd. & Group (Delhi High Court)
The Delhi High Court has held that legal framework concerning applications under Section 245C (1) of the Act fundamentally requires a “full and true disclosure” of additional income. It must be noted that the procedure prescribed under Chapter XIX-A of the Act is a marked departure from the general procedure involving assessment by the AO and consequent action under the law. As briefly observed in the initial part of this judgment, this departure is meant to provide an opportunity for the assessee to come clean regarding the income and tax payable thereon.
However, the relief envisaged in Chapter XIX-A of the Act is wide in nature and apart from settlement and quantification of payable tax, it also protects the assessee from prosecution and penalties, if so ordered by the Income Tax Settlement Commission (ITSC). At the root of this incentive, lies a commitment of the assessee to make a full, true and honest disclosure of the income, source of income and additional tax payable thereon. Once it is seen that the disclosure was not full and truthful, the ITSC loses its jurisdiction to entertain such an application as well as to provide any immunity to the applicant from prosecution and penalties.
Hence, in the present case, the ITSC has erred in law by approving the application of the respondent-assessee group under Section 245C of the Act. The ITSC further went on to grant immunity from the penalty and prosecution under Section 245H of the Act, which was contrary to the twin conditions stipulated herein above. Thus, the ITSC acted in excess of the jurisdiction conferred upon it under the Act.
In view of the aforesaid, the order dated 9 June 2014 is, hereby, set aside. The writ petition is, accordingly, allowed and disposed of alongwith pending applications, if any.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
In the facts of the present petition, we are called upon to examine the statutory requirement of “full and true disclosure” under Section 245C of the Income Tax Act, 1961 [“Act”], pre-conditions associated with an application under Chapter XIX-A of the Act and effect of violation of the said pre-conditions on the jurisdiction of the Income Tax Settlement Commission [“ITSC”] as well as the fate of the application.
2. The present petition filed by the Revenue seeks quashing of the order dated 09 June 2014, passed by the ITSC, under Section 245D (4) of the Act, for the Assessment Years [“AY”] 2001-02 to 2007-08.
FACTUAL MATRIX
3. The relevant facts for deciding the controversy at hand would reveal that the respondent-assessee group is engaged in real estate business in Delhi, and particularly in the development of commercial complexes. The business activities of the respondent-assessee group involve purchase of land from the Delhi Development Authority on auction, followed by development and sale of the same to various customers.
4. On 11 October 2006, a search and seizure operation was conducted at the business and residential premises of the respondent-assessee group under Section 132(1) of the Act. During the said operation, various incriminating documents including jewellery and cash were found and the same were accordingly seized. Subsequently, the case of the respondent-assessee group was centralized with the Assessing Officer [“AO”], Central Circle-08, New Delhi.
5. During the pendency of the assessment proceedings, the respondent-assessee group, vide letter dated 30 May 2007, preferred settlement applications under Section 245C (1) of the Act before the ITSC for AYs 2001-02 to 2007-08, thereby, disclosing an additional income of INR 1,53,50,504/- in toto. Consequently, the Commissioner of Income Tax [“CIT”], Central-II, New Delhi, filed a report under Rule 9 of the Income Tax Settlement Commission Procedure Rules, 1997 [“Rule 9”] on 12 February 2008, raising various issues against the respondent-assessee group, inter alia, doubting the genuineness of the transactions with respect to share capital amounting to INR 23.69 crores.
6. On 09 June 2014, the ITSC admitted all the applications filed by different members of the respondent-assessee group, including business entities and individuals therein, to settle their income tax liability. While deciding the settlement applications, the ITSC passed the impugned order and declared the total additional income to the tune of INR 18 crores, which includes a voluntarily offered amount of INR 1 crore at the instance of the respondent-assessee group.
7. While passing the impugned order, the ITSC accepted the Revenue’s contention that unaccounted money was introduced as bogus share capital by the respondent-assessee group and thus, it proceeded to make the aforesaid addition.
8. Out of the total addition of INR 18 crores in the case of the respondent-assessee group, additions amounting to INR 7.51 crores (includes voluntarily offered sum of INR 1 crore) and INR 10.49 crores were made in the case of Pankaj Buildwell Ltd. [“Pankaj Ltd.”] and Raghav Buildwell Ltd. [“Raghav Ltd.”], respectively, both of which form part of the respondent-assessee group.
9. However, as per the claim of the Revenue, an amount of INR 23.69 crores ought to have been added in the category of bogus share capital in the case of Pankaj Ltd. The Revenue’s claim was based upon the summons issued to the alleged shareholders, which were returned undelivered and thereby, alluding to the non-existence of such shareholders. Furthermore, the respondent-assessee group is also stated to have bought back shares from the family members of the promoters, having a face value of INR 13.15 crores at a nominal cost of INR 13.15 lakhs.
10. Thus, being aggrieved by the underestimation of the additional income and failure upon the part of the respondent-assessee group to make full and true disclosure of the income before the ITSC, the Revenue has filed the instant writ petition.
REVENUE’S SUBMISSIONS
11. Mr. Shlok Chandra, learned counsel appearing on behalf of the Revenue, submitted that the respondent-assessee group has failed to fully and truly disclose the additional income before the ITSC, which was an elementary requirement for proceeding with any application made by an assessee in terms of Chapter XIX-A (Sections 245A to 245L) of the Act. According to him, the scheme of Chapter XIX-A does not envisage revision of the application filed by the assessee under Section 245C (1) of the Act.
12. He contended that during the course of proceedings, the respondent-assessee group had offered certain additional amounts which clearly shows that full and true disclosure of income was not made in the application under Section 245C of the Act. He, therefore, submitted that the respondent-assessee group had not approached the ITSC with clean hands.
13. Learned counsel for the Revenue further argued that the CIT, in its Rule 9 report dated 12 February 2008, has calculated and quantified the undisclosed sum of INR 23.69 crores for AYs 2001-02 to 2007-08 as the total amount of bogus share capital. The said quantification is based on the summons issued to the shareholders, which had returned undelivered, thereby, indicating the non-existence of most of the alleged shareholders. He, therefore, contended that the ITSC has erroneously accepted the amount of INR 6.51 crores as bogus share capital and the impugned order does not contain the reasons based on which ITSC has ascertained the aforenoted amount.
14. Learned counsel for the Revenue also contended that the ITSC gave a contrary finding in its order, wherein, on one hand, it held that the explanation offered by the respondent-assessee group with respect to the face value of the share capital/premium was not genuine and on the other hand, the ITSC has allowed the revision application of the respondent-assessee group under Section 245C of the Act.
15. In addition, he placed reliance on the legislative mandate prescribed under Section 245H of the Act, which envisages a two-fold satisfaction namely, (i) full and true disclosure of income and the manner in which such income was derived and (ii) cooperation of the applicant in the proceedings before the ITSC. He, therefore, contended that the ITSC has mechanically recorded a finding that the respondent-assessee group has made full and true disclosure and fully cooperated in the proceedings before it. Thus, it granted immunity to the respondent-assessee group from penalty and prosecution.
16. He further contended that the respondent-assessee group bought back shares having a face value of INR 13.15 crores at a nominal cost of INR 13.15 lakhs from the family members of the promoters of respondent-assessee group in an unusual manner. According to him, the said transaction indicates a malafide transaction, which is highly unlikely to have taken place in a genuine manner.
17. He advocated that once it was accepted by the ITSC that the respondent-assessee group had not made full and true disclosure, the application under Section 245C (1) of the Act should have been rejected at the very outset. He, therefore, submitted that the ITSC has erred in accepting the application made by the respondent-assessee group.
18. He contended that the ITSC had misinterpreted the judgment of the Hon’ble Supreme Court in the case of Brij Lal & Others v. CIT1 while directing that the interest chargeable under Section 234B of the Act was to be charged upto the date of the order under Section 245D (1) of the Act in the present case.
19. In support of his contentions, learned counsel for the Revenue placed reliance on the decisions of the Hon’ble Supreme Court in the case of CIT Jalpaiguri v. Om Prakash Mittal2 and Ajmera Housing Corporation v. CIT3 and the decision of this Court in the case of PCIT v. Om Prakash Jakhotia4 and CIT v. ITSC5.
RESPONDENT’S SUBMISSIONS
20. Per contra, Mr. Salil Aggarwal, learned counsel appearing on behalf of the respondent-assessee group vehemently opposed the submissions made by learned counsel for the Revenue.
21. Learned counsel for the respondent-assessee group submitted that they had filed an application under Section 245C (1) of the Act for the AYs 2001-02 to 2007-08 by disclosing an additional income of INR 98,43,706/- qua Pankaj Ltd. He contended that replies dated 19 July 2012, 31 January 2014 and 20 February 2014 along with complete documentary evidences were filed before the ITSC to establish the identity and creditworthiness of the shareholder and the genuineness of the transaction, which was questioned by the Revenue in the CIT report.
22. Learned counsel further submitted that a sum of INR 1.60 crores was surrendered in respect of share capital for AY 2003-04 and assessment for the same was made under Section 143(3) of the Act. Similarly, assessment for AY 2004-05 was also made under Section 143(3) of the Act.
23. He contended that no incriminating material was found during the course of the search and despite the same, they voluntarily agreed to surrender an amount of the share capital which was in doubt. He further submitted that the ITSC, after a detailed discussion, had given reasons for arriving at its findings of additional income of INR 6.51 crores for AY 2002-03 and 2003-04 in the case of Pankaj Ltd.
24. Learned counsel for the respondent-assessee group submitted that after the settlement of the aforesaid sum, the CIT made a further assertion concerning an additional unaccounted income of INR 1.65 crores. He contended that the respondent-assessee group, without any material being found against it, further offered to surrender a sum of INR 1 crore, and in the spirit of settlement and cooperation, a total amount of INR 7.51 crores was offered before the ITSC despite the unaccounted amount being INR 6.51 crores.
25. With regard to the undelivered summons on shareholders, learned counsel for the respondent-assessee group argued that the share capital was acquired during the AYs 2001-02, 2002-03, 2003-04 and 2006-07. He contended that significant time had elapsed before enquiries were initiated and furthermore, the absence of shareholders before the Revenue cannot be a basis for drawing adverse conclusions against the respondent-assessee group. He relied upon the decisions in the cases of Commissioner of Income Tax v. Five Vision Promoters (P.) Ltd.6 , PCIT v. Paradise Inland Shipping (P) Ltd.7, CIT v. Oasis Hospitalities (P.) Ltd.8, CIT v. Kamdhenu Steel & Alloys Ltd.9 and CIT v. Anshika Consultants (P.) Ltd.10 to submit that merely because shareholders were not found at their addresses, the same cannot be a ground to make additions.
26. Further, it was submitted by the learned counsel for the respondent-assessee group that insofar as the prayer for waiver of interest under Sections 234A, 234B, and 234C of the Act is concerned, the ITSC has rightly held that interest under Sections 234A and 234C of the Act would be charged as per law till the date, order under Section 245D of the Act was passed.
27. Additionally, he contended that the subsequent sale of shares at a reduced price was irrelevant for determining the authenticity of the investment in the share capital. He also submitted that the issue of tax avoidance in repurchasing shares from the promoters’ family members at a nominal cost of INR 13.15 lakhs, compared to the face value of INR 13.15 crores, needs to be scrutinized in the hands of the purchaser of the shares. He, therefore, asserted that there is no reason to question the legitimacy of the share capital received by the respondent-assessee group.
28. Furthermore, learned counsel argued that the ITSC has offered well-founded justifications for granting immunity from prosecution and penalties, considering the facts and circumstances of the case. According to him, as a customary practice, the ITSC usually grants immunity from penalties and prosecution under the Act when an applicant exhibits full cooperation in resolving the case and provides a comprehensive and truthful disclosure of their income. In context of the present case, he contended that it is uncontested that the respondent-assessee group had duly cooperated and the same was acknowledged by the ITSC in the impugned order, wherein, a significant cooperation to the extent that the respondent-assessee group voluntarily offered a substantial amount was ex-facie
29. Moreover, he asserted that the ITSC has issued the order following the procedure outlined in the Act and has meticulously adhered to it, both in its literal interpretation and its intended purpose. Consequently, he argued that there is no justification for any intervention.
30. Lastly, while addressing the issue of revision, learned counsel for the respondent-assessee group relied upon the decision of the Gujarat High Court in the case of CIT v. Income-tax Settlement Commission11 to advocate that there is no bar on revision being made before the ITSC.
31. We have heard the learned counsel appearing on behalf of the parties and perused the record.
DISCUSSION
32. It is pertinent to point out that the solitary issue for our consideration is “Whether the ITSC was justified in considering the application filed under Section 245C of the Act despite recognizing the absence of a full and true disclosure of income?”
33. Before delving into the merits of the case, it would be beneficial to refer to the underlying legal framework concerning the issue at hand in the present petition.
Legislative mandate enshrined under Chapter XIX-A of the Act
34. The structure outlined in Chapter XIX-A of the Act was introduced by the Taxation Laws (Amendment) Act, 1975. This chapter aims to facilitate prompt and harmonious resolution of cases, ensuring the timely collection of taxes owed to the Income Tax Department.
34.1 Further, Chapter XIX-A also allows an assessee to submit an application under Section 245C (1) of the Act, provided it includes full and true disclosure of its income, the method by which it was obtained, and the additional amount of income tax due on said income. The relevant extract of Section 245C of the Act is reproduced herein below:-
“245C.Application for settlement of cases:(1) An assessee may, at any stage of a case relating to him, make an application in such form and in such manner as may be prescribed, and containing a full and true disclosure of his income which has not been disclosed before the Assessing Officer, the manner in which such income has been derived, the additional amount of income tax payable on such income and such other particulars as may be prescribed, to the Settlement Commission to have the case settled and any such application shall be disposed of in the manner hereinafter provided….”
34.2 The settlement application under the aforesaid Section necessitates a thorough declaration of any additional income by the applicant. Through Form No.34B, extensive details are requested and the applicant is required to sign a verification form affirming the completeness and accuracy of the provided information.
34.3 Section 245D of the Act delineates the procedure to be followed by the ITSC, upon receiving an application for settlement under Section 245C of the Act. Pursuant to sub-Section (1) of Section 245C of the Act, the ITSC is empowered to solicit a report from the CIT. Based on this report and considering the nature and circumstances of the case or the complexity of the investigation involved, the ITSC may, after conducting a preliminary enquiry, decide whether to allow the settlement application or reject it.
34.4 Furthermore, sub-Section (4) of Section 245D of the Act confers upon the ITSC an authority to issue an order, subsequent to examining the records and the report provided by the CIT. This occurs after hearing both the applicant and the CIT, or their authorized representatives, and after reviewing any additional evidence presented before it. The relevant part of Section 245D (4) of the Act is extracted herein below:
“245-D. Procedure on receipt of an application under Section 245-C.
—
4. After examination of the records and the report of the [Principal Commissioner or Commissioner], if any, received under—
(i) sub-section (2-B) or sub-section (3), or
(ii) the provisions of sub-section (1) as they stood immediately before their amendment by the Finance Act, 2007,
and after giving an opportunity to the applicant and to the [Principal Commissioner or Commissioner] to be heard, either in person or through a representative duly authorised in this behalf, and after examining such further evidence as may be placed before it or obtained by it, the Settlement Commission may, in accordance with the provisions of this Act, pass such order as it thinks fit on the matters covered by the application and any other matter relating to the case not covered by the application, but referred to in the report of the [Principal Commissioner or Commissioner].”
34.5 Such orders may be issued by the ITSC upon arriving at the satisfaction that the applicant has cooperated in the proceedings and has provided a complete and accurate disclosure of its income along with the sources therein.
34.5 Recently, in our decision rendered in Pr. Commissioner Of I Tax (Central)-II v. M/S Trent East West LPG Bottling Ltd.12, we had an occasion to extensively deal with the exposition of law on the issue under consideration. The relevant paragraph of the said decision reads as under:-
“18. The ITSC comes to be moved pursuant to an application being made by an assessee referable to Section 245C of the Act. The said application must contain a “full and true” disclosure of the income which was not disclosed before the AO as also the entire income which is sought to be made subject matter of consideration before the ITSC. Additionally, the applicant is obliged to disclose the means from which the income was so derived, the additional amount of tax which is payable and such other particulars as prescribed under the Rules. In terms of Section 245C(3) of the Act, once an application comes to be submitted before the ITSC, it cannot be withdrawn by the applicant. On receipt of such an application, the ITSC commences the process of evaluating whether the application is liable to be proceeded with. In respect of an application which is allowed to be proceeded with, the ITSC stands empowered to call for a report from the CIT in terms of Section 245D(2B) of the Act. Taking proceedings further and in respect of applications which have not been declared to be invalid, the ITSC in terms of Section 245D(3) of the Act is enabled to call for the records and, if deemed necessary, to direct such further inquiry or investigation as may be necessary. Pursuant to the aforesaid power as conferred, the Principal Commissioner/Commissioner is obliged to undertake a further inquiry or investigation and submit a report in respect of all matters covered by the application as also any other matter relating to the case. Sub-Section (4) of Section 245D of the Act envisages the ITSC passing final orders upon the application taking into consideration the report submitted by the Principal Commissioner/Commissioner, an examination of all the evidence that may have been placed before it and proceed to pass a final order on matters covered by the application as well as any other matter relating to the case.”
Analysis
35. A perusal of the above position makes it incumbent upon the ITSC to arrive at an unequivocal finding of full and true disclosure in the application. If the ITSC is not satisfied as to the “full and true disclosure” of the income in the application, it shall refrain from advancing with it, thereby, lacking jurisdiction to issue any orders pertaining to the subject matter outlined in the application. The Hon’ble Supreme Court while dealing with the principle of “full and true disclosure” in Ajmera Housing Corporation (supra) has held as under:-
“26…………….
A bare reading of the provision would reveal that besides such other particulars, as may be prescribed, in an application for settlement, the assessee is required to disclose:
(i) a full and true disclosure of the income which has not been disclosed before the assessing officer;
(ii) the manner in which such income has been derived; and
(iii) the additional amount of income tax payable on such income.
27. It is clear that disclosure of “full and true” particulars of undisclosed income and “the manner” in which such income had been derived are the prerequisites for a valid application under Section 245-C(1) of the Act. Additionally, the amount of income tax payable on such undisclosed income is to be computed and mentioned in the application. It needs little emphasis that Section 245-C(1) of the Act mandates “full and true” disclosure of the particulars of undisclosed income and “the manner” in which such income was derived and, therefore, unless the Settlement Commission records its satisfaction on this aspect, it will not have the jurisdiction to pass any order on the matter covered by the application.”
[Emphasis supplied]
36. Additionally, in the case of Om Prakash Mittal (supra), the Hon’ble Supreme Court has held that the essential condition to proceed with the settlement through an application under Section 245C of the Act is the necessity for a complete and honest disclosure of income, including the method by which it was obtained. Following an enquiry into the authenticity of this disclosure, the ITSC may decide to either approve or dismiss the application. The relevant paragraph of the said decision is extracted hereinunder as:-
“16. The foundation for settlement is an application which the assessee can file at any stage of a case relating to him in such form and in such manner as is prescribed. The statutory mandate is that the application shall contain “full and true disclosure” of the income which has not been disclosed before the assessing officer, the manner in which such income has been derived. The fundamental requirement of the application under Section 245-C is that full and true disclosure of the income has to be made, along with the manner in which such income was derived. On receipt of the application, the Commission calls for report from the Commissioner and on the basis of the material contained in the report and having regard to the nature and circumstances of the case or complexity of the investigation involved therein, it can either reject the application or allow the application to be proceeded with as provided in Section 245-D(1).”
[Emphasis supplied]
37. Referring to the particulars of the present case, it is observed that according to the CIT report, the total share capital at the end of the Financial Year [“FY”] 2004-05 amounted to INR 13,76,53,500/-. Out of this sum, only INR 25,33,500/- originated from family or related members of the respondent-assessee group, while the remaining share capital of INR 13,52,20,000/- was sourced from external entities unaffiliated with the respondent-assessee group or their family. Consequently, it was determined that a significant portion of the remaining share capital was derived from the individuals who either do not exist or have been identified as accommodation entry operators, as acknowledged by certain individuals in their statements to the effect that they utilized their bank accounts to facilitate accommodation entries. Notably, regarding the remaining investors, the summons that were dispatched were returned undelivered. The relevant portion from the CIT report is extracted hereunder:-
“A. The balance sheet of M/s Pankaj Buildwell for the year ending 31.3.2002 shows share capital of Rs 10,66,53,500/-. Further share capital was introduced in FY 2002-03 amounting to Rs 3,10,00,000/-. Thus the total share capital at end of FY 2004-05 was Rs 13,76,53,500/-. Out of this only Rs 22,33,500/- was from family/related members of the assessee and the balance share capital of Rs 13,51,20,000/- was from 753 external entities not connected/related to the assessee or his family. Thus the family had only nominal investment as share capital and a major part of the balance is from the entities/individuals which are non-existent or proved accommodation entry operators.”
38. Further, the aforementioned report indicated that in the case of Pankaj Ltd., the respondent-assessee group repurchased the shares allotted to 753 entities and subsequently, transferred them to its family members at significantly reduced prices. For instance, shares with a nominal value of INR 10/- were transferred back at the price of 10 paise, a valuation lacking in rationality. As a result, the respondent-assessee group effectively regained ownership of all the shares at a nominal cost of INR 13.152 lakhs, meaning thereby that a total investment of INR 13.152 crores was transferred in the names of family members or to itself for a meagre sum of INR 13.152 lakhs.
39. Accordingly, the CIT disclosed the amount to be added to the income of the respondent-assessee group in the case of Pankaj Ltd. equivalent to INR 23.69 crores for AYs 2001-02 to 2007-08. It is noteworthy that the report of the CIT recorded that the respondent-assessee group has not adverted to full and true disclosure in the application. The relevant paragraph of the CIT report is being extracted herein for reference:-
“Looking at aforesaid facts, in M/s Pankaj Buildwell Ltd the assessee has routed Rs 23,69,70,000 as share capital/share application money in various previous years. The year wise bifurcation of addition of share capital/share application money is not readily available, therefore, if in excess of Rs.23,69,70,000/- is received by M/s Pankaj Buildwell, the detail of the same may be obtained by Hon’ble Settlement Commission from the assessee and added as unexplained cash credit in the year of receipt. However, the amount of Rs.23,69.70.000/- is added as unexplained cash credit in the hands of assessee for A.Y. 2001-02 to A.Y. 2007-08. This aspect has not been disclosed at all by the assessee in its application before the Settlement Commission. Therefore, the disclosure of the assessee does not represent the correct undisclosed income and should be treated as incomplete disclosure.”
[Emphasis supplied]
40. Later on, during the course of proceedings, the ITSC took note of the said undisclosed income as highlighted by the CIT report and sought a reply from the respondent-assessee group to furnish an explanation on the aforesaid aspect.
41. The report of the CIT and reply of the respondent-assessee group on the main issues, as highlighted in the impugned order are reproduced herein below:-
