Entry level requirements for filing Settlement Application

Pre- Conditions for filing Settlement Application- Pendency of the ‘Case’ - 245A(b)- Assessments must be pending or deemed to be pending (in case where reopening is permissible but notice has not been issued) before the Assessing Officer at the time of filing settlement application

Recommendation of Wanchoo Committee

The Wanchoo Committee in Chapter 2, entitled Black money and tax evasion”, paragraph 32 recommended that ‘This, however, does not mean that the door for compromise with an errant taxpayer should forever remain closed. In the administration of fiscal laws, whose primary objective is to raise revenue, there has to be room for compromise and settlement. A rigid attitude would not only inhibit a one-time tax-evader or an un-intending defaulter from making a clean breast of his affairs, but would also unnecessarily strain the investigational resources of the Department in cases of doubtful benefit to revenue, while needlessly proliferating litigation and holding up collections.’

Pre- Conditions for filing Settlement Application

Pendency of the ‘Case’ – 245A(b)

– Assessments must be pending or deemed to be pending (in case where reopening is permissible but notice has not been issued) before the Assessing Officer at the time of filing settlement application

– ‘Case’ would be considered to be pending from following dates:-

(i) Assessment year for which return has been furnished u/s 139 / 142 but time period to issue notice u/s 143(2) has not been expired from the first day of assessment year. [Rescuwear Corporation *, In re [217 CTR [ITSC, Calcutta-SB]

(ii) Assessments year for which notices u/s 143(2) have been issued from the date of issue of such notices

(iii) Assessment year for which notice u/s 148 has been issued by the Assessing Officer from the date of which such notice has been issued.

(iv) If notice for one assessment year has been issued u/s 148 but such notice could also be issued for remaining assessment years for which re-opening is permissible under the Act by the Assessing Officer proceedings for such assessment years shall be treated as pending for the purposes of section 245C.

(v) Assessment which has been cancelled or set aside by Tribunal u/s 254 and matter has been remitted back to the Assessing Officer to make assessment from the date on which such order was passed.

(vi) Assessment which has been cancelled or set aside by the PCIT/CIT u/s 263 or 264 and matter has been remitted back to the Assessing Officer to make assessment from the date on which such order was passed.

(vii) Assessment years for which notices u/s 153A/153C have been issued from the date of issuance of such notices

Full and True Disclosure of Income

Settlement Commission is a platform where assessee agrees to compromise its tax liabilities with the tax administration by making settlement application. Modus operandi for build-up of income not disclosed before the Assessing Officer is insisted upon in order to seal such route for continued tax evasion subsequently. The process of settlement is set rolling by the assessee making an application for settlement, which must have a true & full disclosure of income concealed from the Department and the manner in which such income is earned. This admission of assessee helps the department in:

(a) avoiding long drawn investigation and litigation to prove that income was earned and concealed by the assessee,

(b) Immediate recovery of taxes as the assessee is liable to pay tax on admitted income before filing the application for settlement, and

(c) Plugging loopholes due to in depth knowledge gained about manner of earning of income concealed. The assessee gains by way of immunity from penalty and prosecution provided he co-operates in settlement process.

The applicant must make full and true disclosure of its income which has not been disclosed before the Assessing Officer in the settlement application and also demonstrate the manner in which such income has been derived. Revision of income disclosed in petition u/s 245C(1) is not permissible. Pukhraj Bhabhutmal Shah vs ITO [2015] 55 taxmann.com 219 (Guj). Proper recourse is to withdraw said application before its admission u/s 245D(1) and to file is afresh after removing the defects.

No conditions or criteria have been prescribed for deciding whether an application is fit for settlement. Therefore one can say that only conditions prescribed in S. 245C(1) are relevant for deciding whether to allow an application to be proceeded with.

Though an assessee has to make full and disclosure even in return of income as required by section 139, the said condition in Chapter XIX-A is prescribed twice. Section 245C prescribes conditions for a valid application and one of the main conditions is full and true disclosure of income. The same condition is again prescribed in S. 245H. S. 245H prescribes immunities that may be granted by the ITSC and the conditions on satisfaction of which the said immunities may be granted. Therefore, full and true disclosure is required to make a valid application and the application may be declared as invalid if found lacking on said count at the time of admission u/s. 245D(1) or 245D(2C). Further at the time of settlement, if application is found to be lacking on the said count, immunities may be denied. What constitutes full and true disclosure can be determined on facts of each case.

Settlement application admitted u/s 245D(1) based on full and true disclosure of income by the Settlement Commission is liable to be rejected u/s 245D(2C) by Settlement Commissioner upon receipt of report of Commissioner u/s 245D(2B) if it concurs, after hearing Commissioner as well as the applicant, on the report of the Commissioner that concealment of particulars of income on the part of the applicant or perpetration of fraud by him for evading any tax or other sum chargeable or imposable under the Act has been established or is likely to be established by any income-tax authority otherwise application is allowed to be proceeded with u/s 245D(2C).

Honorable Supreme Court in Commissioner of Income-tax v. Express Newspapers Ltd. 203 ITR 443 (SC) has held that offer of income for this purpose would not include withdrawal of claim for losses or expenses. As such, to constitute a valid offer of income in application for settlement, income offered must be income as earned. However, settlement is not only of income offered and, therefore, even income which requires to be added will have to be considered and the application will not be restricted to income as earned.

The application must have disclosure of income as earned to satisfy the condition of offer of income not known to the Assessing Officer, but computation of total income is not restricted to the said income and total income will have to be computed in accordance with provisions of the Act, considering full and true disclosure of facts relating to the case.

The application must have disclosure of income as earned to satisfy the condition of offer of income not known to the Assessing Officer, but computation of total income is not restricted to the said income and total income will have to be computed in accordance with provisions of the Act, considering full and true disclosure of facts relating to the case.

Minimum Threshold for Approaching Settlement Commission

– Section 245C(1A) of the Act

– Additional income-tax paid while making settlement application must exceed threshold stated in the provisions i.e.

(i) In case of specified person in whose case notice u/s 153A/153C have been issued as a consequence of search-Rs. 50 Lacs

(ii) In case of other assessee’s who are related to the specified person who has preferred settlement application as lead case and have been issued notices u/s 153A/ 153C of the Act- Rs 10 lacs

(iii) In any other cases- Rs 10 lacs

Applicant must pay additional amount of income-tax on the additional income disclosed in settlement application along with interest u/s 234A,234B, 234C and 234D thereon at the time of filing of Settlement Application and furnish proof of making payment thereof in the settlement application.

The mode of computation of computing additional tax is provided by subsection (1A) to (1D) of section 245C. If the application is for more than one assessment year, than additional tax shall be determined as prescribed for each of the assessment year and the aggregate thereof shall be treated as additional tax payable as per the application. Neptune Developers & Construction P Ltd 55 ITR (T) 484 (ITSC- Mumbai) (SB).

Same Day Intimation requirement to the AO – reg. filing of Settlement Application Form 34BA

– Section 245C(4)

– Applicant must intimated the Assessing Officer in Form No 34BA i.e. a fact of filing of settlement application, on the same date on which settlement application has been made before the Income-tax Settlement Commission in Form No 34B. The moment settlement application in Form No 34B is made to the Settlement Commission, Assessing Officer looses jurisdiction to make assessment and ITSC gets absolute jurisdiction over the case till order u/s 245D(4) is passed. The purpose is to give effect to the provisions of section 245F which provides that exclusive jurisdiction vests in the ITSC from the date of filing settlement application. By the said intimation the Assessing Officer is informed that exclusive jurisdiction over the case now vests in ITSC.

Filing Settlement Application – Once in lifetime Opportunity (for Assessee)

– Section 245K

– Settlement Application should be the firstly and only application for settlement of case by applicant. If any application had been made earlier and admitted u/s 245D(1) and was rejected or got abated for the failure of disclosure of true and correct income and or facts/ delay attributable to the applicant, applicant is not permitted to make settlement application.

– The bar in making settlement application has been further extended to the ‘related persons’ referred to in Explanation below section 245K(2).

Fee for Settlement Application

– Section 245C(2)

– Fees of Rs. 500/- are payable as settlement fees and the paid challan has to be enclosed with the application as proof of payment. Fees payable are per application irrespective of number of assessment years for which application is preferred.

Prosecution Proceeding should not be initiated against the Applicant

– Section 245H

– No proceedings for the prosecution of any offence under the provisions of Income-tax Act as well as Wealth Tax Act have been instituted against the applicant up to the date of making of settlement application. If only show cause has been issued, applicant can approach Settlement Commission for settlement of his case. Settlement Commission has power to grant immunity from prosecution in respect of income-tax and wealth tax only and not under any other legislation. It also has power to waive penalties.

Settlement Application – can’t be withdrawn

– Section 245C(3)

– An application made u/s 245C(1) shall not be allowed to be withdrawn by the Applicant.

Time Limit for passing final Order

– Section 245D(5)

– Final order u/s 245D(4) shall be passed within 18 months from the end of the month in which the application was made.

After filing of the Application

Settlement Commission to have Exclusive Jurisdiction

– Section 245F

– after filing of application, the Settlement Commission shall have exclusive jurisdiction until an order is passed under sub-section (4) of section 245D,

– and shall also have powers to perform the functions of an income-tax authority under this Act in relation to the case

Order of Settlement Commission – Final

– Section 245I

– Orders passed by Settlement Commission are conclusive and final and are confidential. No appeal lies against the orders of Settlement Commission. Said orders are only subject to judicial review in terms of Articles 136 and 226 of the Constitution by the High Courts or by the Supreme Court.

Judicial Views –

Further Voluntary Offer of Income after filing the Application – Whether Allowed?

SUPREME COURT OF INDIA in case of Shree Nilkanth Developers Vs PCIT, reported in [2017] 77 taxmann.com 348 (SC), held as under:-

IT : SLP granted against High Court’s ruling that Settlement Commission could not accept additional income declared by assessee at stage of hearing of application under section 245D(4) merely on ground that it was difficult to ascertain exact undisclosed income on basis of impounded documents

HIGH COURT OF GUJARAT in case of CIT vs ITSC, reported in [2016] 72 taxmann.com 168 (Gujarat), held as under:-

IT: Where assessee at time of settlement raised/revised offers of tax marginally in order to put an end to entire dispute through settlement, it could not be said that original or initial declaration was not true and full disclosure

Additional Income Qua EACH AY Mandatory – or for any one Assessment Year valid?

INCOME TAX SETTLEMENT COMMISSION, MUMBAI (SPECIAL BENCH) in case of Neptune Developers & Construction (P.) Ltd., In re*, reported in [2017] 79 taxmann.com 134 (ITSC – Mumbai) (SB) , held as under:-

Section 245C of the Income-tax Act, 1961 – Settlement Commission – Application for settlement of cases (Scope of)- Whether Settlement Commission can admit application for settlement when additional income and additional tax liability is disclosed for some years and there is no additional income/additional tax for remaining years as long as additional tax payable on income disclosed in application exceeds threshold limits specified in proviso to section 245C(1) – Held, yes [In favor of assessee]

‘Case’ to be considered pending – until – the Assessment Order is SERVED

HIGH COURT OF BOMBAY in case of Yashovardhan Birla vs DCIT, reported in [2016] 73 taxmann.com 5 (Bombay), held as under:-

Section 245D, read with section 245C, of the Income-tax Act, 1961- Settlement Commission- Procedure on application under section 245C (Conditions precedent)- Assessment years 1998-99 to 2014-15- Whether assessment order for purposes of chapter XIX-A/settlement of cases can be said to have been made when it is served upon assessee concerned – Held, yes – On 30-3-2016, assessee filed application under section 245C before Settlement Commission for settlement of cases for assessment years 1998-99 to 2007-08 – Revenue objected application contending that orders of assessment were passed by Assessing Officer on 30-3-2016 itself and assessments were no longer pending – Therefore, application for settlement ought not to be entertained – However, orders of assessment were not served upon assessee till 30-3-2016 – Commission vide order dated 12-4-2016 passed under section 245D(1) and rejected application for settlement holding that there was no pending assessment before Assessing Officer on 30-3-2016 – Whether in view of above principle laid down by Court, Commission was not justified in rejecting application of assessee for settlement – Held, yes [Paras 16 and 17] [In favour of assessee]

Whether Application can be valid in part – i.e. for some of Assessment Years

HIGH COURT OF GUJARAT in case of Ashish Prafulbhai Patel vs ITSC, reported in [2017] 86 taxmann.com 124 (Gujarat) , held as under:-

IT : Where assessee filed application before Settlement Commission for seven assessment years but paid additional tax with interest only for five assessment years due to financial difficulties, application would abate only with respect to years for which payment was not made; it would not abate for other years

Whether refund due to the Assessee can be sought for adjusted against the additional tax before ITSC

HIGH COURT OF BOMBAY in case of Vascon Engineers Ltd. vs ITSC, reported in [2015] 63 taxmann.com 276 (Bombay), held as under:-

IT : Where before Settlement Commission, assessee declared undisclosed income and sought adjustment of additional tax against refund due from revenue, merely because Commissioner recorded wrongly that no refund was due to assessee, settlement proceeding could not be discontinued

Presented by – CA Sakar Sharma – Sakar Sharma & Co.

Assisted by – CA Sunil Maloo – Surana Maloo & Co.

Mail – sharmasakar@gmail.com

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